In the US economy according to Dr. Bernanke, all’s well in the world of QE forever. “I don’t believe significant inflation is going to be the result of any of this,” Dr. Bernanke said in a speech yesterday at the University of Michigan, referring to the Fed’s new policy of pumping in 85 billion a month of new money, created out of thin air by the magic of the Fed. But then he would say that, wouldn’t he. Just imagine if he blurted out, “I do believe significant inflation is going to be the result of this.” Stock markets and the bond market would collapse, gold, silver and crude oil soar, as shocked investors tried to get out of to be depreciated dollars, and into anything with a tangible asset value.
But the Great Doctor then went on that the “worst thing Fed could do would be to hike rates prematurely.” In other words, assuming a trillion a year of QE money creation from nothing actually works as intended, and gets a sustainable recovery underway in America, an assumption that hasn’t worked anywhere on the planet so far, as the US economy picks up and banks start lending again, and as inflation also picks up as all the new money starts chasing a limited supply of tangible goods and assets, the Fed will be slow to try to rein in inflation.
At best, the Dr, Bernanke is implying that the Fed will tolerate a new “normal” higher rate of inflation going forwards, than the old normal for the era 1945-2000, excluding the notorious 1970s. From the low single digits to the high single digits, or worse, the low double digits. Anyone who lived through the notorious 1970s knows only too well what happens under double digit inflation. Those who have bargaining power use that power to force through inflationary wage increases, those lacking bargaining power become downwardly mobile in lifestyle. Those at the bottom on fixed incomes, but lacking large savings, like many if not most pensioners, get forced into choices like food or heat, food or rent, moving to where the cost of living is lower. And this is under the best scenario, where inflation runs only in the high single digits or low double digits.
At worst, the Fed loses control and a great unstoppable inflation breaks out, as everyone tries to cash out of depreciating fiat currency. Vast pools of hot speculative money rush into commodities of all descriptions, “certain” that next month’s prices can only be higher. But commodity prices don’t only go up. Profit taking bouts cause them to implode at times, making planning for many firms next to impossible. MF Global’s and new Lehman’s appear, as leveraged gambling isn’t a one way street. As we all now know all too well from the MF Global scandal, multiple re-hypothecation of the customer funds means that no customer funds are safe.
For most in society, the economy becomes one vast scary, unfathomable nightmare. Note that this is not yet hyperinflation, where paper money almost becomes useless. Hyperinflation is highly unlikely in the USA given its ability to feed itself without imports. Given all the new money creation going on in Europe, China and Japan, the inflation when it hits will be global, though each nation and trading group will experience local variations.
But the prospect of the return of much higher inflation from mid-decade, does allow the prudent time to reduce exposure to the Fed’s fiat money creation. For most that process involves swapping some paper savings for holdings of physical gold and silver, located safely but firmly under your own control. MF Global proved that even holding fully paid up bullion in a US brokerage house didn’t offer any protection.
For those without savings or only tiny savings the future looks distressing. Unlike Europe, very few in North America have had any need to own physical precious metals until very recently. In Europe, with all its wars and devaluations, that wasn’t the case. The wealthy there have always maintained a gold core, usually in Switzerland. Dr. Bernanke has signalled that the Fed will be slow in dealing with inflation, once it reappears on that side of the Atlantic. There is no reason to think that the European central banks or the Asian ones will move any faster than the Fed. Yesterday, Dr. Bernanke was tipping off the well-heeled that it is time to begin starting to move.
Jan. 14, 2013, 5:56 p.m. EST
Bernanke downplays inflation risk of QE3
Worst thing Fed could do would be to hike rates prematurely