The Fed Has Three Choices: Inflation, Inflation, and Inflation

by | Feb 12, 2010 | Headline News | 2 comments

Jesse, of Café Américain, says that we are Approaching a US Dollar Reserve Currency Crisis:

The No matter how they wrap it, spin it, try to hide it, we have seen an epic expansion in the US monetary base not seen since 1932.

This monetary expansion has not yet reached into the broader money supply figures because it is not reaching the public, despite the chant from the “Yes We Can” Kid. Bernanke has most of that liquidity bottled up in a few big banks collecting an easy riskless spread, with some of it chasing beta in the speculative markets.

Ben can talk a tough game, and jawbone rates with his plans to someday return to normalcy. But at the end of the day, the US is playing out a well worn script that is highly predictable.

There are three choices the Sith Lords at the Fed and their western central bank apprentices have at this point: inflation, inflation, and inflation.

The only question is how and when it will become obvious even to the most stubborn believers in the Dollar Ãœber Alles. Ben will seek to control it, to unleash it from its cage very slowly, spread the pain to the US trading partners overseas.

The US dollar reserve currency status is faltering, but not yet under a serious assault. The monied elite will try to eliminate any serious competition, such as the euro or precious metals, by any and all means possible.

Greece is roughly 2.6% of the Eurozone GDP. California is 13% of the US.

How long they can continue this is anyone’s guess. These things tend to play out slowly, over years. I do not expect the US dollar to fail precipitously in the manner of the Zimbabwe dollar or with Weimar Reichsmark, but rather to be devalued in a step-staggered manner, over time, until it stabilizes and the debts are liquidated.

When the US starts closing the greater portion of its 700+ overseas military bases, we will know that it has become serious about financial reform and balancing its books. Until then, all is posturing, self-interest, demagoguery, and deception.

We recently discussed various economic forces at play including deflation, inflation and biflation in Gold Projection: Price Collapse to $250 an Ounce. With so much uncertainty in today’s global economy, it is our view that exploration of the different possibilities and being able to identify what is happening as a result of government intervention into free markets is critical to protecting one’s wealth and liberty.

We do, however, maintain a similar view to Jesse’s, in that we believe that regardless of the deflationary pressures, the Keynesian economists currently in charge of our monetary system will stop at nothing to prolong the pain and kick the can as far down the road as they can.

Our reasoning is that economists like Fed chairman Ben Bernanke and Paul Krugman have this idea that the Great Depression of the 1930’s could have been prevented had the powers that be at the time just printed more money and pumped more stimulus into the system.

Mr. Bernanke, a scholar of the Great Depression, will not make that mistake on his watch. Thus, no matter what it takes, even if it means complete destruction of the US Dollar, The Fed and Treasury will continue to expand money supply ad infinitum, until the system is either saved or destroyed.

We can opine and attempt to predict the short-term effects of these policies, but those focused on the long-term will likely come to the conclusion that inflation, perhaps on a hyper scale, is the probable end result.

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    Comments

    2 Comments

    1. Paul

      Bernanke is Obama’s boy.

    2. Chris C.

      I used to respect Krugman but ever since he came out saying the bailout WASN’T BIG ENOUGH I have washed my hands of him. I wish I could track him down one day and ask him his thoughts on Von Mises credit expansion theory.

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