Monday, February 21, 2011

Raging Against the Machine in Madison, Inflation Only Beginning to Take its Toll

2/21/2011 Portland, Oregon – Pop in your mints…
The world is beginning to rage against the machine.  Egypt, Bahrain, Libya, and Madison Wisconsin?  Yes, it appears that the airing of grievances knows no borders.  It is difficult to be a leader today.  Whether you are a sheik in a desert kingdom or the governor of the cheese heads, the job has gotten increasingly more difficult.
Why?  Again, numerous reasons are being spouted off by numerous analysts.  The general explanation, if you can call it that, is that the Arab world suddenly wants "Democracy."  In the land of Cheese, Unions of public employees are protesting to defend their "right to collective bargaining."  In both cases, we suspect that these folks simply want money and expect the government to give it to them.
Take the case of Egypt.  After the dictator who ruled for over 30 years stepped down, promising a transition to democracy, you would think that the crowds would go home and patiently wait for their ballots to arrive in the mail.  Yet they continue to riot in the streets with more intensity. 
We offer Iraq as another example of democracy failing to satisfy the masses.  After nearly 8 years of war to ouster Saddam Hussein, the Iraqi people are openly expressing their anger at their democratically elected government.
In Wisconsin, which theoretically has had a democracy since it obtained statehood, protestors are camped out on the floor of the legislature and taking to the streets in great numbers in an attempt to prevent the government from reneging on their promises.  What a sight!

As we have stated before, there is but one reason for this sudden outpouring of grievances, inflation of the money supply.  Inflation is fun when asset prices are rising, it is not so fun when the cost of food and gasoline are rising.
And it appears that people will have to get used to rising prices of any and every kind.  The Federal Reserve will not do anything to shut off the fire hose of monetary stimulus until the unemployment rate is at 6%.  What is quickly becoming obvious is that the FED has already done too much.  Shockingly, we are still one year away from absorbing all of the new money that has been pumped into the system.  According to The Mint's proprietary measure of the effects of FED discount rate movements, we should see the 0.25% and below ultra cheap money enter daily life in March of 2012.
If they are already protesting in Wisconsin, imagine what will happen between now and then!
Meanwhile, Silver, our favorite metal, hit another 30 year high north of $32 per ounce on Friday.  Silver and Gold are perhaps the best way to defend yourself from rising food and gas prices over the next year and beyond.  It could be a long time before we see 6% Unemployment and consequently a long time before we see a FED rate increase, especially given Ben Bernanke's beliefs about monetary policy.  Yes, fellow taxpayer, we are in for at least three more years of these shenanigans.
The entire world sees the cost of gas and food, which for most of us are a necessity, rising at a rapid pace and look to their democratically elected government to do something about it.  Meanwhile the government, who sees the same rising costs, responds by cutting costs, going against the wishes of both their citizens and Mr. Bernanke, who desperately needs fiscal stimulus work in conjunction with his monetary stimulus in order for the whole insane monetary system to continue functioning.
Eventually, the governments will give in to these demands for more money, either willingly or by force, just in time for the entire system to explode and/or collapse upon itself.  At that point we will get the gift of the only political system under which man and women can truly be free and therefore have the best opportunity prosper:  Anarchy.
Stay Fresh!
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Key Indicators for Monday, February 21st, 2011

*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.