Friday, October 15, 2010

Basic Supply and Demand or How Low Can Interest Rates Go?

10/15/2010 Portland, Oregon – Pop in your mints…

Before we get into interest rates, I would like to present for your perusal and enjoyment a wonderful example of Government management.  It appears that absentee ballots in Atascosa County, Texas, have for years contained an error.  Can you pick it out?

Image provided by the Austin American-Statesman

Do not fear, dear reader, if you did not you are still probably over-qualified for a position in Government.  The flag above is the “bandera de la República de Chile” (flag of the Republic of Chile) and not the Texas state flag, as logic would dictate.  In defense of the persons responsible for this error, they do look similar.

In other news, it appears that commodities and major currencies are all rallying against the dollar.  This is nothing new for anyone who has been paying attention for the past 10 to 97 years since the creation of the Federal Reserve to mismanage the US Dollar.  However the speed of the current movements is worth noticing, especially if you are a holder of dollars or bonds payable in dollars.

So what is causing this?  We are glad you asked!  In basic terms, Supply and Demand.  The Federal Reserve is just now delivering a supply of US Dollars to the market that the market demanded back in August of 2007, when the collapse of the financial world as we knew it was on the brink of occurring.  So why are the dollars coming to market now, just over 3 years later when the world has already begun to adjust to a world with fewer potential dollars floating around than previously anticipated (indicated by falling interest rates)?  Why was a the Chilean flag proudly displayed on ballots in Atascosa County, Texas?  Sadly, for anyone who depends upon the stability of the US Dollar and the competency of its managers, Government Management is the “why,” nothing more.

While Atascosa County Texas voters and the international press can have a good laugh, correct their error, and go on with their business, US Dollar dependents may quickly find themselves faced with the knee-slapping hilarious problem of holding a currency which is losing purchasing power at a very rapid pace.  What is even more hilarious is that the normal market clearing mechanism for such monetary madness, namely long term interest rates, are on the verge of being manipulated lower by the Federal Reserve (affectionately known as “Quantitative Easing”).  How low can they go?  That is anyone’s guess, dear reader.  From time to time in Japan and Sweden they have gone sub 0% (negative).  Does this seem insane?  Only if you are trying to maintain or increase the purchasing power of the US Dollar it does.

However, the idea of a negative interest rate has an academic appeal as seen in the design of the terra, a global resource backed currency proposal.  In the case of the terra, it is labeled a “demurrage charge” which would be a 3.5% cost to allegedly store the resources used to back it.  All I can say is, if you think the world burns through resources at an unsustainable pace now, wait until there is a 3.5% cost of not using those resources and watch how quickly resources deteriorate.  Concepts such as the terra and implied negative interest rates have no place in the real world where resources must be conserved.  Not only are they insane, if mandated they are downright criminal.

Thankfully, God gave the wise (not academic) gold and silver to use primarily as money.  We just need to be smart enough to actually use it!

Stay Fresh!

David Mint