Best of the Week
Most Popular
1.How U.S. Dollar Destruction Threatens the Global Economy - Steve Forbes
2.Why UK House Prices Will Continue Rising - 'It's Immigration Stupid' - Nadeem_Walayat
3. Bitcoin Price at Beginning of a Move up? - Mike_McAra
4.Gold Price to Plunge, Visiting Fort Knox - David_Hague
5.Silver Price Forecast - Metal to Gain Ground in August on These Factors - Jim Bach
6.Gold And Silver Will Rise With US Dollar Demise, Just Not Soon - Michael_Noonan
7.Bitcoin Price Strong Move Possible - Mike_McAra
8.Israel Gaza War Crimes - Soldier's Ordered to Shoot Civilians Including Children - C4News - C4News
9.UK House Prices Crash Warning - Daily Mail Cognitive Dissonance - Nadeem_Walayat
10.UK House Prices Boom - Top Quick Cheap Tips to Help Sell Your Home - Nadeem_Walayat
Last 5 days
The US Gold in Fort Knox is Secure, Gone, or Irrelevant? - 19th Aug 14
Bitcoin Price On The Brink of a Possible Reversal - 19th Aug 14
Why Tesla Stock Price Will Double in the Next 12 Months - 19th Aug 14
Europe's Economic Malaise: The New Normal? - 19th Aug 14
The Coming U.S. Economic Collapse Will Trigger a Revolution - 19th Aug 14
Market Bubbles, Bubbles Everywhere - 19th Aug 14
This is Your Economic Recovery With and Without Drugs - 19th Aug 14
Stock Market Strong Start to Jackson Hole Week - 19th Aug 14
Iraq, Ukraine - Oh, What A Tangled Mess We Weave - 19th Aug 14
How to Apply Moving Averages as a Trading Tool - Video - 18th Aug 14
Why Short Stock Traders Are Losing Money This Week - 18th Aug 14
Stock Market Rally May be Complete - 18th Aug 14
Why Chinese Citizens Invest In Gold - 18th Aug 14
Palladium Reaches 13-Year High Over $900 oz as Gold Trading Volumes Surge 66% - 18th Aug 14
Understand and Profit from Surging European Volatility - 18th Aug 14
No Escape from The Dollar as The Currency Standard - 18th Aug 14
Stock Market New Highs Less Certain - 18th Aug 14
German Stock Market DAX About To Drop - 18th Aug 14
Stay on Board - Stock Market Big Picture - 18th Aug 14
Europe Economy Is Tanking, QE Is Coming - 18th Aug 14
Are You Ready for The Greatest Technology Revolution Yet? - 17th Aug 14
Why King Coal is Bigger than Oil or Gas - 17th Aug 14
U.S. Empire of Death and Lies - 17th Aug 14
Ukraine - Whose Spin Are We Caught Up In Here? - 17th Aug 14
Time Decay And No Escape For Abenomics - 17th Aug 14
India BSE SENSEX The Party Is Over In Bombay - 17th Aug 14
Stock Market Uptrend Looks Underway - 17th Aug 14
The Key Role Of Conspiracy Theory In Dumbing Down Society - 17th Aug 14
The Federal Reserve in Denial Mode - Bond Market Explained - 17th Aug 14
Stock Market Ukraine-Triggered Volatility, But a Flat Finish - 16th Aug 14
Stock Market Investors Conditioned To Catch The Falling Knife - 16th Aug 14
Decline And Fall Of The CO2 Crisis - 16th Aug 14
Gold Stocks Major New Upleg - 15th Aug 14
Don’t Assume What Is “Unseen” Doesn’t Exist - 15th Aug 14
HUI, Gold and Silver; Fun With Monthly Charts - 15th Aug 14
Cry for Argentina: Fiscal Mismanagement or Pillage? - 15th Aug 14
New 'LBMA Silver Price' - Still Not Transparent - 15th Aug 14
America the Neighborhood Bully Recklessly Throws its Weight Around - 15th Aug 14
The Single Best Investment for the Semiconductor Tek Stock Boom - 15th Aug 14
The Something For Nothing Society - Inflation and Getting Paid NOT to Work - 15th Aug 14
Forecasting Ability of the Elliott Wave Principle - Trader Education - 15th Aug 14
The Most Hated Stocks Bull Market - 15th Aug 14 - Puru_Saxena
America's First Oil Sands Producer and Other Natural Resources Surprises - 15th Aug 14
Life and Times in Propagandistan - 15th Aug 14
The Biggest Lesson from Microsoft’s Recent Battle with the US Government - 15th Aug 14
Russian Bear Rattles Stock Markets, but Plunge Protection Team Rides to the Rescue - 14th Aug 14
Back In Iraq: We Only Want To Save You - 14th Aug 14
Learn How to Spot High Confidence Chart Trade Setups for FREE! - 14th Aug 14
More Bad News is Good News for the Stocks Bulls - 14th Aug 14
If Mr. Rogers Ruled Wall Street - 14th Aug 14
Government Spending and Negative Interest Rates - 14th Aug 14
Gold, Silver, Dow and VIX Market Updates - 14th Aug 14
Don't Get Ruined by These 10 Popular Investment Myths - 14th Aug 14
Gold and Silver Miners that Can Make Money Now - 14th Aug 14
Low and Expanding Risk Premiums Are the Root of Abrupt Stock Market Losses - 13th Aug 14
Stock Market at the Precipice - 13th Aug 14
When Gold Miners Have Already Rallied – Will Metals Follow? - 13th Aug 14
Oil Market QE Premium Is Coming out of Price - 13th Aug 14
Putin is Winning the New Cold War - 13th Aug 14
No Silver Money For Mexico, But Perhaps Gold For Eurasia - 13th Aug 14 -
Japan Economic Collapse - GDP Plunges by 6.8%! - 13th Aug 14
Confusion To New “London Silver Price” Launch This Friday - 13th Aug 14
Interest Rate Policy Global Divergence - Really? - 13th Aug 14
Stock Market Two-Day Rally Ends with a Small Loss - 13th Aug 14
Resources Stocks Where to Stash Your Money When Europe Heats Up? - 13th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

The Fed Plays All Its Cards, Road Map for Currency Debasement

Currencies / US Dollar Oct 03, 2012 - 01:09 AM GMT

By: Peter_Schiff

Currencies

Best Financial Markets Analysis ArticleThere never really could be much doubt that the current experiment in competitive global currency debasement would end in anything less than a total war. There was always a chance that one or more of the principal players would snap out of it, change course and save their citizenry from a never ending cycle of devaluation. But developments since September 13, when the U.S. Federal Reserve finally laid all its cards on the table and went "all in" on permanent quantitative easing, indicate that the brainwashing is widely established and will be difficult to break. The vast majority of the world's leading central bankers seem content to walk in lock step down the path of money creation as a means to economic salvation. Never mind that the path will prevent real growth and may ultimately lead off a cliff. The herd is moving. And if it can't be turned, the only thing that one can do is attempt to get out of its way.


The details of the Fed's new plan (which I christened Operation Screw in last week's commentary) are not nearly as important as the philosophy it reveals. The Federal Reserve has already unleashed two huge waves of quantitative easing (purchases of either government securities or mortgage-backed securities) in order to stimulate consumer spending and ignite business activity. But the economy has not responded as hoped. GDP growth has languished below trend, the unemployment rate has stayed north of 8%, and the labor participation rate has fallen to all-time lows. In the meantime, America's fiscal position has grown significantly worse with government debt climbing to unimaginable territory. Despite the lack of results, the conclusion at the Federal Reserve is that the programs were too small and too incremental to be effective. They have determined that something larger, and potentially permanent, would be more likely to do the trick.

However, in making its new plan public, the Fed made a startling admission. At his press conference, Ben Bernanke backed away from previous assertions that printed money would be effective in directly pushing up business activity. Instead he explained how the new stimulus would be focused directly at the housing market through purchases of mortgage backed securities. He made clear that this strategy is intended to spark a surge in home prices that will in turn pull up the broader economy. Such a belief requires a dangerous amnesia to the events of the last decade. Despite the calamity that followed the bursting of our last housing bubble, economists feel this to be a wise strategy, proving that a poor memory is a prerequisite for the profession.

But now that the Fed is thus committed, the focus has shifted to foreign capitals. Not surprisingly, the dollar came under immediate pressure as soon as the plan was announced. In the 24 hours following the announcement, the Greenback was down 2.2% against the euro, 1.6% against the Australian Dollar, and 1.1% against the Canadian Dollar. A week after the Fed's move, the Mexican Peso had appreciated 2.7% against the US dollar. Many currency watchers noted that more dollar declines would be likely if foreign central banks failed to match the Fed in their commitments to print money. On cue, the foreign bankers responded.

It is seen as gospel in our current "through the looking glass" economic world that a weak currency is something to be desired and a strong currency is something to be disdained. Weak currencies are supposed to offer advantages to exporters and are seen as an easy way to boost GDP. In reality, weak currencies simply create the illusion of growth while eroding real purchasing power. Strong currencies confer greater wealth and potency to an economy. But in today's world,no central banker is prepared to stand idly by while their currency appreciates. As a result, foreign central banks are rolling out their own heavy artillery to combat the Fed.

Perhaps anticipating the Fed's actions, on September 6th the European Central Bank announced its own plan of unlimited buying of debt of troubled EU nations (however, the plan did come with important concessions to the German point of view - see John Browne's commentary). On September 17th, the Brazilian central bank auctioned $2.17 billion of reverse swap contracts to help push down the Brazilian Real. The next day, Peru and Turkey cut rates more than expected. On September 19th, the Bank of Japan increased its asset purchase program from 70 trillion yen to 80 trillion and extended the program by six months. It's clear we are seeing a central banking domino effect that is not likely to end in the foreseeable future.

Although the Fed is directing its fire towards the housing market, the needle they are actually hoping to move is not home prices, but the unemployment rate. Until that rate falls to the desired levels (some at the Fed have suggested 5.5%), then we can be fairly certain that these injections will continue. This will place permanent pressure on banks around the world to follow suit.

All of this simultaneous money creation will likely be a boon for nominal stock and real estate prices. But in real terms such gains will likely not keep pace with dollar depreciation. Inflation pushes up prices for just about everything, so stocks and real estate are not likely to prove to be exceptions. Even bond prices can rise in the short term, but their real values are the most vulnerable to decline. In fact, even nominal bond prices will ultimately fall, as inflation eventually sends interest rates climbing. But prices for hard assets, precious metals, commodities, and even those few remaining relatively hard currencies should be on the leading edge of the upward trend in prices.

While I believe the Fed's plan will be a disaster for the economy, the silver lining is that it provides investors with a road map. As the policy of the Fed is to debase the currency, those holding dollar based assets may seek alternatives in hard assets and in the currencies of the few remaining countries whose bankers have not drunken so freely from the Keynesian Kool-Aid. We believe that such opportunities do exist. Some broad ideas are outlined in the latest edition of my Global Investor Newsletter, which became available for download this week. I encourage those looking for ways to distance their wealth from the policies of Ben Bernanke to start their search today.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

Peter Schiff Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014