by Richard Young | June 22, 2011 11:04 am
Who in the world would pay $15 for a draft beer? Well the question is more, where would one pay such an astronomical price and why? The who is me. The where is Paris. And the why is the destruction of the purchasing power of the U.S. dollar courtesy of the Fed and the profligate folk in Washington.
When the Fed artificially lowers interest rates (see zero Fed funds rate), investors and savers lose their appetite for dollar-denominated holdings. And when the Fed guns the money printing presses, creating an excess of banking liquidity, international investors tend to flee the dollar. As such, a one-two punch is delivered, sending the dollar down versus hard currencies, like the Swiss franc, and trading currencies, like the euro.
In France, a bistro bill is calculated in euros, and Americans must convert their dollars for euros. At an exchange rate of $1.44, an American is going to pay $14.40 for every 10 euros. That is quite a premium, is it not? I have come to think of a French draft Kronenbourg 1664 as a Bernanke beer. OK then, I am accusing the Fed of cheapening the dollar by depressing U.S. interest rates and flooding the American banking system with excess liquidity. You’ll know I am right when you see a pickup in the monetary base (high-powered money) and excess bank reserves. My charts indicate that these exact conditions exist.
Doesn’t excess liquidity generally result in higher inflation and interest rates? Indeed yes, but with perhaps an extensive time lag. Inflation can emerge in many ways. In fact, it is possible to have deflation and inflation at the same time. It is simply a matter of what rock you are turning over. Today is just such a period.
In March, housing prices fell for the eighth consecutive month. With a three-year inventory of homes in foreclosure, America is facing a foreclosure epidemic. What we are looking at in the housing sector is deflation that is likely to extend for a number of years. On the flip side, we have inflation in most of our everyday living costs, featuring the two biggest concerns — fuel and food (which the Fed strips out of the core CPI).
The longtime marker for inflationary stress is the price of gold. In the early days of the Bush administration, gold was priced under $300 and ounce. Today, the price of gold is over $1,500 an ounce. Young Research’s Monetary Price for gold is over $11,000 an ounce. All of this comes hand in hand with a booming (2009/2011) stock market, the result of an asset inflation bubble.
We also face booming commodity prices, which the Fed blames on excessive demand out of China and India. You can buy into the demand theory to a point, but you also know darn well that excess liquidity in the banking system is going to show itself on many fronts.
The Fed is adroit at trucking out price indices that help support its case for price stability. Well, Americans visiting French bistros, as well as gold investors, know better and pay scant heed to Fed blather. And longtime, savvy investors sure are not buying the Fed charade.
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