Thursday, October 14, 2010

Is Inflati… I mean, Economic Recovery Around The Corner?

10/14/2010 Portland, Oregon – Pop in your mints…

A quick glance at the news tells us that inflation at the producer level, the kind that comes downstream to the items we purchase every day, increased by 0.4% in September, which would be 4.8% annually if the pace kept up.  Well above the 2% that the FED pretends to manage the money supply to.  These statistics are all to be taken for what they are worth as they are, after all, the product of Government work.

Meanwhile, the price of gold is breaking nominal price records and is now at $1,376 and your author's favorite metal, the one we believe to be one of the best investments on the planet, silver, is at $24 and rising.  More of this to come for today we must quickly take a look at what the FED may be doing or, in our view, overdoing.

The chart below is an attempt by yours truly to model the effects of the FED’s machinations intended to somehow “control” the money supply.  In this case, it is the widely observed tool called the FED Funds Target Rate which is currently at or below 0.25%.  The wave like image in the foreground is the rate announced corresponding to the month in which it is announced.  In the background is what I call the “Perceived Economic Effects”, in other words, when the average Joe actually feels this wave of new money coming his way.

According to the model, in November 2010 the average Joe should begin the downhill descent off of the pressure put onto him (or her) by the 5.25% rates that were in effect until August of 2007.  In essence, the model contemplates that it takes 39 months for actions by the FED to be felt on main street.  This would explain why most of the positive results are currently being reported by banks and other entities who are closest to the spigot of new money that the FED opened in August 2007.

Have you felt the effects, dear reader?   If you are in synch with the chart above that answer would be "not yet."  When people look back on these hard times, my prediction is that they will begin to notice a change for the better starting in November 2010.  The great question in my mind is whether or not this will be a true recovery, the beginning of stagflation, or a preamble to hyperinflation and the destruction of faith in paper currencies?  While hoping for the former, I would put my money on either of the later two.  Hold on to your hats!

Thank you for your time,

David Mint