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. - from
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
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 grow.
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 system.
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 rise.
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 www.goldenbar.com
Up for discussion
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
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
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.