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inflation

Will the Federal Reserve Devalue the Dollar?

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The news around the world has been rather interesting over the last few weeks.  We have Iran trading Oil for Gold instead of PetroDollars.    The Greek crisis still has not been solved while Italy, Spain and Portugal are struggling to stay solvent.  China has signed fourteen currency swap agreements bypassing the US Dollar.  The Federal Reserve has announced that it will keep interest rates at or near zero until 2014.  The US has just raised its debt limit once again, with little opposition.  We all know that 2012 is an election year in the USA which usually means very little will be done in Washington.

So what will we see this year?  Will we see Deflation or Inflation? Currently I hear news out of the USA and here locally in Panama that items are going up in price. I just spent a week in San Jose, Costa Rica where one liter of Coca Cola was $2.50.  They were just forced here in Panama to raise the minimum wage to $500 just so people could afford to survive.  You can imagine the repercussions, many businesses will have to let employees go in order to keep the doors open.  Here in Panama we use the US Dollar as our currency.  Who is to blame for the inflation we are seeing?  It is not the printing presses fault. It is the powers behind the printing.

Way back on November 21, 2002 there was a Federal Reserve Governor named Ben Bernanke, who gave a speech to the National Economist´s Club.  In this speech he outlined exactly what he would do if he was Chairman of the Federal Reserve in the instance of a financial crisis or Depression.

  1. The Federal Reserve would lower the interest rate to zero
  2. Purchase Securities from Banks (GM, Chrysler)
  3. Increase the Money Supply
  4. Buy Countries Debt QE1, QE2, QE3 and QE Infinity
  5. Devalue the Dollar

I will not go into each of these scenarios individually.  We all know that points one through four are already in play.  The one that has not occurred yet is the devaluation of the Dollar.  Mr. Bernanke calls himself a student of the depression.  He has studied The Federal Reserve actions during that time.  Here is an excerpt from that speech.

Ben Bernanke November 21, 2002

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it´s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt´s 40 percent devaluation of the dollar against Gold in 1933-34, enforced by a program of Gold purchases and domestic money creation.  The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.  Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.  If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt´s devaluation.

Original speech can be viewed here

On April 3rd 1933 President Roosevelt declared the Presidential Order 6102.

All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933.

At this time Gold was valued at $20 per ounce.  Shortly after the Gold confiscation was completed the Federal Reserve revalued Gold at $35 per ounce or a 40 percent devaluation of the currency.  Remember that during this time the Dollar was backed by the promise of Gold.

In my mind Mr. Bernanke is telling us what he is going to do next if the economy does not respond to the other four measures that he has implemented.  What would a 40% devaluation of the US Dollar do to your savings if everything is in US Dollars or a currency pegged to the Dollar? The devaluation of the US Dollar would be great for Gold, Silver, Home Values, Debt and the stock market.  What about the people that do not have hard assets?  People who live off Social Security, Government Subsidies, Fixed Incomes and Savings will have a difficult time.  Imagine tomorrow you wake up and your savings has just been devalued 40%.

Growing up I was taught that putting your savings in the bank was important.  Today it seems that the idea is no longer valid.  What Mr. Bernanke has told us is that he will devalue the currency in order for the country to continue to have growth.  What are you doing to protect your family and future?

By: Randy Hilarski - The Rare Metals Guy

U.S. Inflation Set to Soar as the Country’s Chief Export Boomerangs

January 13, 2011
By Martin Hutchinson, Contributing Editor, Money Morning

While prices for food and energy have been rising, inflation in the United States has remained relatively subdued.

One common explanation for that phenomenon is that U.S. inflation has been “exported” to China and elsewhere through the U.S. Federal Reserve’s monetary policy. And given the perennial U.S. balance of payments deficit, it’s good to know the country has found something it can successfully export!

However, the bad news here is that inflation does not stay exported - and in 2011 it may boomerang back to make life on Main Street miserable.

Thankfully, there are precautions we can take to combat higher prices and preserve our wealth.

U.S. monetary policy has involved excessive money creation since 1995, fueling asset bubble after asset bubble. However, it has not produced inflation in the United States because the dollar is a reserve currency, so excess dollars flow to countries whose economies are more vulnerable to inflationary pressures.

In the 1990s, the excess dollars flowed to Argentina, whose currency was pegged to the dollar. The imported inflation wrecked Argentina’s sound policies of that decade and contributed to a debt-fueled collapse in 2001. Since 2008, the excess money has gone to China, India, Brazil and other fast-growing emerging markets. It also has fueled a massive growth in foreign exchange reserves among the world’s central banks. Central bank holdings of forex reserve have grown more than 16% per annum since 1998.

China, India, and Brazil all currently have massive inflation problems. China, which has increased its inflation by holding down its currency against the dollar, has been very proactive in tackling inflation as of late. The People’s Bank of China (PBOC) surprised the markets on Christmas Day by raising its one-year refinancing rate by 52 basis points to 3.85% and increasing the benchmark deposit rate by 25 basis points to 2.75%.

The PBOC has increased bank reserve requirements five times in the past year and raised interest rates twice - albeit by a scant 0.25% each time.

China’s official inflation rate currently is 5.1%, up from 1.5% at the beginning of 2010, but its figures are suspect. The PBOC probably will have to raise its benchmark rate several more times from its current level of 5.81% before it’s able to bring inflation under control.

India’s inflation is about 7.5%, but is expected to rise further since food prices are surging at double-digit rates. Prices for onions, for instance, are up 33% from last year. The Reserve Bank of India (RBI) is again raising interest rates, now at 6.25%. But, as in China, sloppiness in official inflation statistics means Indian interest rates are negative in real terms and the RBI will have to continue raising rates if it wants to control inflation.

Brazilian inflation was 5.91% in December and is rising fast. Newly elected President Dilma Rousseff fired the central bank chief and is trying to bring interest rates down from their current level of 10.75%. Again, inflation seems likely to surge in the near term.

To complete the BRIC (Brazil, Russia, India, and China) picture, Russian inflation is currently running at 8.8%. That’s down from a year ago, but still much higher than the Russian government would like it to be.

With inflation rising in all four BRIC countries and many other emerging markets, the U.S. holiday from inflation cannot last much longer. The Fed’s second round of quantitative easing (QE2), which included purchases of $600 billion in Treasury bonds before July, and the December package of tax cuts are also fueling inflationary forces.

Money growth, which had been low in 2009 after the burst in late 2008, has once again risen to worrying levels. Over the last four months, the average growth rates of broad money on the Federal Reserve Bank of St. Louis’ Money of Zero Maturity and M2 Money Stock measures were up 10% and 7%, respectively. That’s comparable to their growth in the 1970s.

Furthermore, oil prices are approaching $100 per barrel, and other commodity prices are strong, as well. So however successful the Fed has been in exporting inflation since 2008, its success won’t last for much longer. At some point in 2011, inflation will be re-imported - and probably with a roar rather than a whisper.

When that happens, the Fed will have to raise interest rates to fight rising prices. Of course, Federal Reserve Chairman Ben Bernanke will almost certainly resist this inevitability, fudging figures and producing spurious arguments to avoid making the right decision. When the Fed does eventually raise rates, it will do so grudgingly - as it did during the period from 2004 to 2007.

That means higher short-term interest rates probably won’t arrive until 2012, and higher long-term rates could potentially be delayed by more quantitative easing. The result will be an unholy mess that takes the form of surging inflation in 2011 and a second recessionary “dip” in 2012.

Gold and other commodities will continue to offer protection against the surge in inflation in 2011, as they have in the last few years. At some point, though, the market will start to anticipate tighter Fed policy and gold and other commodities prices will collapse.

Still, in 1979-80, gold and commodities prices went on rising for more than three months following then-Federal Reserve Chairman Paul Volcker’s famous 1979 “October surprise,” in which he pushed up the Federal Funds rate by two full percentage points over a weekend.

If the gold and commodities markets didn’t believe the obviously serious Volcker would stop inflation until several months after he took decisive action, they certainly won’t have confidence in the actions taken by a reticent Ben Bernanke. So your gold and commodities investments will probably be pretty safe even if the Fed does eventually start raising rates. Certainly they are a good bet for now. More importantly, they will protect you against the pending surge in inflation.

Swiss Metal Assets appears on Deutsche Welle Television Show