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

11/12/2010 Portland, Oregon – Pop in your mints…

We left off Wednesday wondering just what a good Central Banker is to do when faced with the supposed "Peril" of deflation?  If you missed Wednesday's Mint, please take a moment to review it at the link below as it will greatly help your understanding of what follows:

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

For a brief refresher, Dr. James Bullard, the President and CEO of the St. Louis FED, published a research paper cleverly titled Seven Faces of "The Peril".  Instead of reading the paper, we summed it up here in this handy cliff notes version:

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.

Is The World Waking up to Gold?

11/9/2010 Portland, Oregon – Pop in your mints…

The cold, rain, and accompanying haze began to move into Portland.  The weekend was a constant battle as the sun tried to shine on as the clouds regrouped and doubled their gloomy offensive.  In between the action we could see geese following their collective biological GPS south for the winter.  In the war for seasonal climate domination, autumn has begun the week firmly in control.

Does this surprise anyone?  Of course not!  The weather in the Northern Hemisphere has followed this pattern for as long as anyone can remember.  It is interesting to see what the weather will bring each day as the seasons change but if the current season is known, there is no question as to where the weather is headed.  In Portland, it is clear that we are going to get slowly and thoroughly soaked at various temperatures that can generally be called "cold or colder" over the next several months.  It is referred to in these parts as winter.

Unemployment “Steady” and Has the Lone Ranger Arrived? Ron Paul vs. the FED

11/8/2010 Portland, Oregon – Pop in your mints…

Perusing the news we see that China and Germany, economies that actually produce more than they consume, are openly mocking US economic and monetary policy ahead of the next G20 meeting.  It is a wonder the G20 even bother to meet.  At least it gives protesters of all stripes a world stage in which to air their grievances, which is nice.  To us here at The Mint, the G20 resembles an uncomfortable high school reunion where the participants do their best to update each other on their progress and make feeble attempts to "get together and do something" before the next reunion.  Little if any meaningful real world action actually occurs or comes as a result of what happens at these meetings.  Which is probably a good thing.

Looking further, we see that the stated unemployment rate, one of our key indicators, remained unchanged at 9.6%.  We will elaborate later on the importance of what the unemployment rate as stated by the Bureau of Labor Statistics  means to dollar holders and the bond markets.  What is important is that, this stated unemployment rate (which is the product of many "adjustments" by the government statisticians) gives us the signal as to what the FED will do with regard to monetary policy.  High unemployment = loosening of monetary policy (more inflation) on the horizon. Lower unemployment = tightening of monetary policy (less inflation) on the horizon.  This current unemployment number, concerns about its accuracy aside, simply gives the FED the cover it needs to continue to needlessly inflate the currency at the expense of savers and bondholders.