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Federal Reserve Policy Pushes the U.S. Dollar Ever Closer to Collapse

Currencies / US Dollar Oct 15, 2010 - 06:22 AM GMT

By: Money_Morning

Currencies

Best Financial Markets Analysis ArticlePeter D. Schiff writes: Much of the content of the latest U.S. Federal Reserve statement, released on Sept. 21, echoes the central bank's previous post-credit-crunch pronouncements: There is still too much slack in the economy, interest rates are still going to be near-zero for an "extended period," and the Fed will continue to use payments from its Treasury purchases to buy yet more Treasuries.


But this recent statement uses a new turn of phrase that should have Americans very upset. The Fed says "measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate." Though the wording treads lightly, it should not be taken lightly. It may signal the final push toward dollar collapse.

The Fed's dual mandate, since an amendment in 1977, has been to promote "price stability" and "maximum employment." While often discussed as if both goals are complementary facets of one mandate, they tend to have been at odds during every recession since the Great Depression.

The problem is that central banks tend to keep interest rates too low for too long (usually to create a feeling of prosperity credited to the government), which then causes major asset bubbles. When the bubbles pop, there is a period of high unemployment during which prices are supposed to fall. Then, the central bank must choose between boosting short-term employment through inflation or defending price stability by allowing assets to return to a reasonable market value. Aside from the early 1980s chairmanship of Paul Volcker, the Fed has always chosen more inflation.

But it has never admitted it.

The Fed statement said that "inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate." Notice that there is no mention of a deflation threat here - as quantitative easing has effectively quashed that possibility - but rather "subdued inflation for some time."

The Fed defines inflation differently than I do, as an increase in consumer prices rather than the amount of dollars in circulation. By my definition, massive inflation has already been created, which is reflected in the fact that prices for houses, consumer goods, stocks, and bonds haven't fallen steeply and stayed down since the dot-com and mortgage bubbles popped.

But even by the Fed governors' definition, they acknowledged that we are experiencing inflation - just not enough for their taste.

Apparently, according to the renegade policy of the Fed, we're not paying enough for food, energy, clothing, healthcare, or education. No matter that nearly 20% of the population is unemployed or underemployed, that each U.S. taxpayer's share of the federal debt is now some $121,000, or that average tuition at a private university is set to rise 4.5% this year to $27,325. Apparently, these factors do not affect "price stability."

Some might say that a certain amount of inflation must be permitted when unemployment is so high - that the dual mandate involves trade-offs. If that were the case, then when we were in a boom period like the 1990s or mid-2000s, the money supply should have been shrunk. Also, there is ample evidence that falling prices during the Great Depression actually provided life-saving relief to the unemployed.

The truth has always been that whatever question you ask the Fed, the answer is inflation. With prices drifting steadily upward since its establishment in 1913, I dare to ask: Has the Fed ever achieved its dual mandate?

The market has certainly lost any hope of price stability in dollar terms. Since the Fed statement was released, gold prices have hit new all-time nominal highs, silver is the highest since the Hunt brothers tried to corner the market in 1980, and the Aussie dollar (a commodity currency) is nearing its own record highs. Even housing is headed back up. Meanwhile, the dollar index has hit a new seven-month low. In short, holders of U.S. dollars are trading for any real assets they can acquire.

A confounding factor is the strong performance of dollar-denominated bonds. When the Fed creates inflation, it erodes the value of fixed-asset investments like bonds, which can't adjust their returns to the new price level. So many commentators are pointing to the record low bond yields as evidence that inflation is not a threat. But this is a misreading of the situation.

What is overlooked is that when the Fed prints more dollars, it typically uses them to buy bonds. Traders know this, so they are stocking up on bonds at ridiculous prices just to flip them to the Fed. They don't care that, in the long run, the Fed's policies will destroy the bonds' value because in the short run, the weak dollar policy serves as a tremendous subsidy to bond sellers.

All the salient indicators tell me that the global dollar crisis has entered a new phase. The Fed is getting more aggressive about money printing because it really doesn't have any other politically viable options. I've always said the Fed uses inflation to give appearance of prosperity, but I never expected them to come out and say it! You don't give warning when you're about to rob somebody, because then the victim might take precautions -- in this case, buying gold and foreign equities.

We should be angry at what the Fed has pledged to do to us, and frankly I'm surprised there hasn't been more of an uproar. But what's more important is to figure out how you are going to protect yourself.

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "Crash Proof: How to Profit from the Coming Economic Collapse," as well as "The Little Book of Bull Moves in Bear Markets." His latest book is "Crash Proof 2.0: How to Profit from the Economic Collapse." For more information about Schiff's new gold-coin-and-bullion company, Euro Pacific Precious Metals, please click here.]

Source : http://moneymorning.com/2010/10/15/federal-reserve-dollar/

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Comments

gAnton
15 Oct 10, 19:52
Bernanke--A Reverse Midas Touch?

I see four obvious reasons why I think if left unrestrained, Bernanke's farcical antics probably would result in a tremendous economic disaster for the world economy:

1. Ben Bernanke told the congress in October of 2005 that they didn't have to worry about the housing bubble busting because the increases in housing prices was based on "very strong economic fundamentals". Most of his public and official statements and predictions have been out and out wrong, and this puts in doubt his level of understanding of the economic system.

2. If his QE-1 ("quantative easing first attempt", which is a euphemism for a virtual helicopter drop of trillionss of funny-money US dollars on Wall street's worthy) efforts were successful as initially advertised, there would be no need for a QE-2 attempt. Regardless of the Obama hype, QE-1 was a dismal failure. Also, the principal cause of the housing bubble forming and bursting was and is Bernanke's policy of paying the banks to borrow Bernanke's funny money. Using one of Bernanke's favorite words, this money was supposedly going to "stimulate" the economy, but what it did was precipitate the biggest economic crisis since 1929.

3. Bernanke is always talking about controlling this and that, but he is never able to control more than one variable at a time--for example, he has controlled interest rates, but has failed controlling anything else at the same time. He is indeed the king of unforeseen consequences. The idea that he can temporarly raise the inflation rate to a prespecified high rate, keep it there for a prespecified period of time, and then permanently lower it to a prespecifed medial rate is ludicrous when viewed within the context of his past "accomplishments".

4. Bernanke is just plain unlucky. King Midas had what is commonly refered to as the "Midas touch"--everything he touched turned to gold. Bernanke has a reverse Midas touch--everything he touches turns to something else!


anonymous
09 Dec 10, 09:28
kidnapped money

1There were ready to leave, billions of dollars, from the country of Brazil, from the product sales, for an U.S. tire manufacturer, selling to the whole world, were nearly one hundred billion dollars that had to leave from brasil in the year 1962, to the U.S. Treasury Department, it is unclear why the trip wre stop it, from the country of Brazil going to the country of the United States of America, 1962 to 1963, also in the same year of 1962, there were ready to leave billions of dollars from Mexico to the same arrival at the Treasury Department of the United States of America, also proceeds from the sale of U.S. factories in Mexico that sell products around the World,

U.S. federal agents they have to investigate the arrive and the destination from all that money, that after 10 years, that money must have quality of being money stolen, and have to recover and should not be used, why this series money must be used in new money, after ten years in country it will be stolen money, U.S. federal agents have to investigate, the because that money came out, some say those money thet want it to be stolid by the Germans to be use to fight at the same U.S. government, the Mexican´s expresident in the year 1976, he was questioned, why the mexicans they have kidnapped the U.S. federal reserve money in the country of Mexico, without leaving, the Mexican expresident in 1976, he said he does not want to steal tose money, but some say the money were stopped to can change, the concept and name tag, from the the returning tag, of that money to the U.S. Treasury Department, the concept it should be, because sales of American products factories. German and Britanic, spies were guarding those money going from Brazil and Mexico in tose 1962 to 1963 years..


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