Letter to Mother on Fed induced inflation, which is exported, then returns home

January 18, 2011

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    ”Did you notice in today’s WSJ the article by Ronald McKinnon of Stanford examining 3 separate instances in which the Fed provoked inflation?

    Most interesting to me was his observation that after commodity prices and inflation in the periphery dollar countries rise, as has now happened, there are “long and variable lags” before it hits the US.

    A comparative yearly chart would be more informative, but he notes that the 1971 US abandonment of the gold standard hit Japan in 1972-73 but, despite 1970s stagflation, US inflation did not exceed 13% until December 1979 — 7 years later.”

    Yes, it’s interesting how it goes overseas first before returning home. The lag is why the Fed always gets it wrong , both on the way up and the way down – too late to tighten, and too late to loosen.  Amusingly, the central bank and their regulation of credit and money allegedly smoothes economic cycles, but the booms and busts are so much worse now than before the central bank.  Inflation is already here however. Cotton, coffee, oil, copper, coal, aluminum, zinc, corn, wheat, soybeans, health care, education, etc. etc are all up. But according to the Fed, there is no inflation in sight.

    Now I shall rant -the Fed’s first priority is to the banks and to make sure they have profits under the guise those profits will help everyone. They have indeed helped the banks, but are now starting to hurt anyone that holds US dollars as they have to pay more for everything. Throughout history governments have favored inflation and cheapening the currency since lowering the value of the dollar is a way to pay back debts with devalued paper. It is very much a tax on anyone holding the given currency, whether that be cash, cd’s, money markets, or people that buy Treasury bonds for income, etc.

    It’s also such a slippery slope and they just can’t help themselves for a little more inflation, so it eventually ends in a crises in that currency as no one wants to hold something that’s losing value. It’ s why throughout 5000 years people eventually require an anchor to prevent governments from doing it and why governments always try to shed themselves of that anchor (getting off the gold standard). Right now, it’s a race to the bottom, with all governments competitively devaluing and wanting a lower currency . So that means the price of everything goes higher.

    In any event, the next crises is going to be so much worse – as it will be a crises of confidence in fiat paper, the dollar, and US Treasury Bonds. The reason is now there is so much debt, higher interest rates will inevitably make interest payments exceed tax revenues. That is the end game. It’s Europe, then Japan, but eventually it will get around to us. It’s wishful thinking at best to think it will not happen for another generation. Unfortunately, such as in life, it takes a crises to make a change in behavior.

    The other thing is they always manage to shift the blame. The Fed still says lowering interest rates to 1% had nothing to do with people buying homes. In order to believe that, you have to believe interest rates have nothing to do with the size of a person’s payment and that how easy it is to get a mortgage has nothing to do with buying a home. They blame the banks instead for lending too much. But the Fed controls the price of and of availability of those loans. The banks are just the bartenders of that credit.

    Next they are going to blame investors, speculators, and anyone else for buying commodities and hard assets and not wanting to hold US dollars as they cheapen them. The nerve!

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