Fed's McTeer says: Focus on Growth not Inflation!
Goldenbar's Bugos replies: Only if he will Focus on Inflation
yen dipped overnight against the U.S. dollar to its lowest
since October 1998 after comments from Japan's Economics
and Fiscal Policy Minister Taro Aso that the idea of allowing
the yen to weaken had been discussed with the U.S.
Reuters March 30th.
is no manipulation… say it again… there is no manipulation!
If we say it enough, maybe it will even work, the actual
manipulation that is. Sorry, I couldn't resist. What does
it mean that the idea of allowing the Yen to weaken had
been discussed? Ok, to put it another way, substitute the
word "Yen" with "the Nikkei" above, and it sounds like this:
Nikkei dipped overnight to its lowest level since October
1998 after comments from Japan's Economics and Fiscal
Policy Minister Taro Aso that the idea of allowing the
stock market to weaken had been discussed with the U.S.
- fictitious wordplay
well right it's manipulation! And it is nothing new to us.
In fact, allowing the Yen to weaken really means "submitted
to the political pressure by helping it weaken," which
is precisely what happened when the Bank of Japan slashed
interest rates back to zero last month. Of course, since
the justification is to prop up the economy, there must
be no evil. But there is a reason that this pressure exists
in the first place, and it has to do with a global monetary
order, which has evolved out of chaos.
It has grown out of the necessity to create a world of efficient
commerce, but its aim is always to stabilize the nearly
century old Fiat paper money experiment. Entire privately
financed infrastructures have been erected to exploit the
inefficiencies one would expect to find in this kind of
monetary system. Indeed, stability (currency or otherwise)
is the prime directive of many a monetary policy AND it
often appears that even the vast array of trading programs
tend to (or perhaps should) collectively move the markets
toward stability anyhow. But the volatility continues to
critics of capitalism accuse free markets of inherent instability,
yet it is not capitalism that is the problem. If you think
long enough, you might conclude that a multi trillion-dollar
derivatives industry exists, for instance, only to hedge
the risks that necessarily must rise if the aim is to stabilize
the otherwise unsupportable paper markets at higher and
higher levels. For it involves risk-taking to move
the markets to higher levels in the first place. But why
must a Fiat system expand to survive? Because the system,
by the book called an inflationist system, is of
use to no one if it cannot continue to grow, or inflate,
because that is the very reason it exists in the first place.
inflation is not the Federal Reserve System's number one
enemy. It is their agenda to inflate, but to do it gradually
so that it can be controlled, and remain unseen. On the
contrary, inflation is your number one enemy, gradual or
otherwise, and they have been allowed to do it right under
our noses for so long now that it has become impossible
to tell the difference between a real price and a nominal
price. Historians of money note that our perception of purchasing
power must rely on its recent past performance (of the unit),
if you will. But today there is additional influence on
our varied perceptions of purchasing power. The freely
floating exchange rate system, which is really a negotiated
(as opposed to free market) exchange rate between other
allied nations who subsist under this new monetary order,
is a constant source of price distortion. How many industries
have grown out of the necessity to stabilize and exploit
volatile exchange rates? Or perhaps it should be asked this
way: how much business does the average multinational company
do trading derivatives in order to balance its books these
days? Is it all really necessary? Of course it is, if you
want to stabilize an enormous international paper money
the Chaos happened long ago. Historians rightfully argue
its precise origins, but for the sake of simplicity let's
just say that the chaos we refer to here succeeded the Nixon
dollar gold break, officially in 1973, and was largely monetary.
It was not a good time to be a banker because the dollars
that were lent quickly became worth less. Essentially, what
Nixon had done was to throw away the anchor, and what the
banking community had to do, if it was to survive, was to
stabilize the mess, which they were able to do with international
currency arrangements and by raising their interest rates
into the high teens. This forced some deflation into the
"inflationist" US economy in 1981, and thus replaced the
anchor, symbolically at least, if only temporarily. Hence,
the father of today's reborn Federal Reserve, the head of
the global monetary order, must therefore have been Paul
Volcker, then Chairman of the Federal Reserve Board.
central bankers must have gradually learned that when Americans
fear that deflation can be bestowed upon them, this symbolic
anchor, as effective as Smith's Invisible Hand, worked for
enacting policy. For deflation expectations produce demand
for hard currency, and thus help buoy the value of the currency
that "appears" the hardest. There are certainly several
economic laws that will help you determine which currency
that is, but the nation with the most widely circulated
currency, and the most net debt, ain't gonna be it by default.
However, should the foreign exchange rate of the dollar
rise, for many of the unrelated reasons that we will touch
on this week, investors will find it expedient to conclude
a deflationary outcome. Indeed, that is what has been happening.
And accordingly, deflation expectations have been on the
expectations, on the other hand, will typically produce
a surplus of currency if confidence in it breaks down, which,
if taken to the extreme, can produce the inflation breakdown
Mises refers to as the "crack-up boom." Normally,
bankers, being creditors, would prefer deflation to inflation
for want of protecting the value of that particular currency,
which they have lent in large sums and over long periods
of time. But today, bankers are stock/equity holders also,
and some are even likely to turn up net debtors. So, today,
they are after the best of both worlds. And there is a way
that they might have both too.
if they could incite a fear of deflation without having
to cause deflation, which incidentally is not just declining
prices, but that part of the price decline attributable
to a contracting stock of money? When money supply expands,
and prices decline, that is not deflation. That is more
profit for bankers. There is plenty of cash in the system.
The question is first, what is its quality, and second,
who owns it?
of our subscribers emailed us a question this weekend. It
was a challenging question, and I think one that is on all
of our minds these days:
While the Treasury yield-curve is getting
steeper, the so-called real yields on the inflation indexed
securities, and their prices, have not moved much. If
inflation expectations were built into the yield curve,
one would expect some movement in the indexed bonds. What
am I missing? No other than the great investor Sir John
Templeton recently urged investors to exit the share markets
in favor of long-dated non-callable bonds... a remarkable
statement from a very successful investor and someone
who has seen both deflation and inflation. I am not one
to dismiss his remarks lightly... signed Goldenbar subscriber.
Templeton isn't the only one. There is a long list of prominent
money managers, who fall clearly in the deflation as
the most likely successor to the recent excess (in the US)
camp. But we believe that they are wrong and that the deflation
fallacy is the path of least resistance, for them, at the
moment. It is perhaps hard for a conservative investor to
expect that excess will breed further excess until there
is something to prevent it. Yet that is the nature of things
today, and there seems to be nothing to prevent the Fed
from cheapening the price of money at its own discretionary
whims, until now. As Wall Street buzzes about rumors of
another inter meeting rate cut, sending short term yields
to new lows, the long bond is beginning to roll over, forcing
a steeper yield curve. The event is so near I can smell
it. A crashing long bond will change everything. It might
even ignite the gold market.
why in this month's issue (to subscribers). For more information
about subscribing to The Goldenbar Report, go to Subscriber
discussion this week:
dollar price of Gold toys with 20 year lows, but analysts
are no longer asking the question "which way is
it going to go now?" So since most have already
decided that its next stop is $180, it might be worthwhile
to observe that it has been gaining on everything but
the dollar, and bond, since year end.
the inflation of the money stock, gradual or otherwise,
is supposed to manifest in rising prices everywhere, why
is the CRB down? Why is the US Treasury's inflation indexed
bond trading at a discount to current inflation rates
and relative to the 30 year long bond? Why are the biggest,
best paid, and most influential analysts telling us to
fear deflation rather than inflation?
Strong dollar policy increasingly threatens the survival
of the global monetary order, over which it currently
presides, with sheer arrogance.
will drive currencies in the future? Rate of return or
risk aversion? 10
years ago, had you approached someone - anyone - and said
that you think the dollar will rise because the Fed will
lower interest rates, they would have given you some spare
change for the next bus to Oz.