Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Stuck in Neutral on Monitory Policy Response to Stagflation

Economics / Stagflation Jul 02, 2008 - 03:03 PM GMT

By: John_Browne

Economics Best Financial Markets Analysis ArticleOn June 25th , the Fed made no changes in its key interest rates and issued a statement that underscored how narrow their room for maneuver had become. Caught between the opposing forces of economic contraction and inflation, the Fed revealed that it was locked in neutral.  Given that the Fed must use opposite remedies to satisfy the demands of its dual mandate (higher rates to curb inflation and lower rates to stimulate growth), the Fed is stuck firmly in neutral.  There appears to be nothing left to do except to talk and hope for the best.


This inaction did not inspire confidence.  The market sell-off in the days since the meeting has accelerated the swoon that has seen American stocks down by some 20 percent in the first six months of 2008.  It is now official: the ‘bear' market has begun.

Although leading policy makers do not dare to utter the name, the conditions currently confronting the Fed are known as “stagflation”.  However, America is not the only major economy facing this grizzly beast.  The European Union is also coming to grips with the problem.  The difference in the manner that the America and Europe deal with the issue could make a huge impact on the world economy for years to come.

Unlike the American Fed, the European Central Bank (ECB) has only a single mandate; to curb inflation.  Further, the ECB is based in Germany and is infused with a distinctly Germanic ethos.  Although the bank president is in fact a Frenchman, Monsieur Jean-Claude Trichet, his policy moves firmly root him in the Teutonic financial tradition.

It is widely known that, since its terrible experiences with hyper-inflation after World War I, the Germans have developed an ingrained intolerance of inflation. As a result, the ECB has shown a backbone that is completely lacking among the invertebrates at the Federal Reserve.  The resulting confidence has led many holders of U.S. dollars, including central banks, to diversify major parts of their vast holdings of U.S. dollar trade surpluses into the Euro.

In just eight short years, this vast transfer of money has made the relatively young Euro the second most important currency in the world.  There are now more Euros in physical circulation than there are U.S. dollars.  Also, the Euro has risen in price by some 64 percent since its launch in 2000, to $1.64.  This is all the more extraordinary, when one considers that Europe does not have either a single economy or even a single government.  As yet, it is still only an association of governments!

Of course, much of the credit for the astounding rise of the Euro must go to the massive debasement of the U.S. dollar, a debasement that has robbed every single man, woman and child who holds or invests in dollars.

The debasement of the U.S. dollar started way back in the 1970s, with the choice of inflation, over taxation and debt, as the means of financing the unpopular Vietnam War.  It was enhanced by President Nixon's breaking of the U.S. dollar/gold ‘exchange window' in 1971.  Since then, the American economy has tragically become transformed from that of a ‘producer' base to one of a ‘consumer' base.

Some may wonder why the holders of vast U.S. dollar reserves, such as central banks around the world, could tolerate this continued dilution of their dollar wealth.  The answer, of course, was that there was no alternative.  The American economy dominated the world and its dollar was ‘King' largely because it was the undisputed ‘reserve' currency.  As a result, almost all internationally traded commodities were priced in U.S. dollars.

In addition, many nations, including OPEC countries and China, have decided to peg their currencies to the dollar.  Finally, all international oil producers demanded payment in U.S. dollars.  This meant that a Swiss buyer of oil had first to purchase U.S. dollars in order to buy oil.

The result was that the ‘reserve' status provided a massive underpinning for the U.S. dollar and has long delayed its decline.

Today however, things have changed, dramatically.  Many oil producers now demand Euros in payment for oil.  Important nations have abandoned the dollar as a peg for their currencies.  Worst of all, the debasement of the U.S. dollar is fast eroding faith in paper money.  There is now rising, but so far hidden, pressure for a more reliable international ‘reserve' currency.

The most obvious choice would be the Euro, especially after the expected European unification treaty of Lisbon is finally ratified in 2009.  If it is, one can expect increasing pressure to have the Euro adopted as a replacement or as an alternative international reserve currency.

If the U.S. dollar loses or even has to share its ‘reserve' status, it will become increasingly vulnerable to a panic run.  The July 3 rd meeting of the ECB is likely to prove crucial.  If the Germanic view wins out and the ECB raises its rates, it risks both a run on the dollar and the possible loss of the dollar's ‘reserve' status.

If such a move were adopted, it would involve a further international risk; the pushing of a looming recession into a depression, just as it did in 1930, when the same anti-inflation sentiment prevailed.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2019 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