The Mint: The “Peril” Through the Eyes of a FED Head

Wednesday, November 10, 2010

The “Peril” Through the Eyes of a FED Head - Part I

11/10/2010 Portland, Oregon – Pop in your mints…

We look out the window today and find that, apart from commodity and stock prices racing higher at a neck and budget breaking pace, the world appears much the same as we knew it before the FED announced QE2, its latest desperate attempt to devalue the US dollar. The FED claims that, in doing this, it is helping the US economy. We hope that the absurdity of this claim is obvious but at The Mint, we know that when we assume we risk making an ass out of "u" and "me" so a brief explanation of our position is in order.

We are conditioned as a society to associate increasing nominal value (the value of things in terms of a monetary unit such as the dollar) as "good" and to associate decreasing nominal value as "bad." However, this conditioning is based on the assumption that the monetary unit is a stable measure of value. FACT: the US Dollar has lost 98% of its purchasing power over the past 100 years. Does that sound stable? So we need to understand that the dollar is far from stable. What is important, then, is to look at RELATIVE values through an ever-changing monetary lens. To gain a true understanding of the relative value of a good or service, we recommend that its value in dollars be measured against gold, the historical global money's, value in dollars at any given time.

Gold = 5000 Years of Stability

How deep is this social conditioning of which we speak? It is so deep that Dr. James Bullard, the President and CEO of the St. Louis FED, the organization charged with keeping the world supply of US dollars stable, dedicates 14 pages and a bunch of goofy unintelligible graphs to give academic justification for printing counterfeit money (they don't even really print most of it!) His goal is to desperately find a way to avoid the "Peril" of falling into a Japan-like slump where both interest rates and inflation rates remain near or below zero for a very long time. The dilemma, as he sees it, is that once the interest and inflation rate expectations approach zero, there is nothing more the Central Bank can do to "stimulate growth" (i.e. pad the pockets of their member banks). The title of his paper sounds like something right out of the book of Revelation (a comparison that ends right after the title):

You can read the whole boring thing here: Seven Faces of "The Peril"

Or you may read my condensed version as follows:

"Deflation is bad, we'll end up like Japan, which must be bad, too. Therefore, we need inflation…I mean, we need the economy to grow! What should we big shots at the FED do to accomplish this? We could 1) Deny that it is happening and wait for inflation…I mean, the economy to improve on its own, 2) Assume that interest rates are simply stable and 0% is the right rate for the outrageous amount of money we have printed that is just refinancing old debts and not creating inflation…I mean new debts, 3) Do what we did in 2003 and take rates to 1.0 to 1.5% and hope for the best, 4) Freak everyone out and increase rates and hope that inflation…oops, there I go again! I mean that the economy improves, 5) Imitate the Bank of England that has somehow survived 314 years and never lowered their rate below 2% and again, hope that works, 6) Hope the government spends themselves to the brink of insolvency like some EU member nations, 7) Buy up US Treasury bonds and give counterfeit money to the government and hope that works!"

Just what is a good Central Banker to do when faced with such "Peril"? Tune in Friday (or read the whole boring paper yourself) to find out!

Have a great Veteran's Day and Stay Fresh!

David Mint