Quantitive Easing = Inflation
Source: http://www.bloomberg.com/news/2010-10-29/gold-will-outlive-dollar-once-slaughter-comes-commentary-by-john-hathaway.html
Gold Will Outlive Dollar Once Slaughter Comes: John Hathaway
By John Hathaway - Oct 28, 2010 6:00 PM PT Bloomberg Opinion
The world’s monetary system is in the process of melting down. We have
entered the endgame for the dollar as the dominant reserve currency,
but most investors and policy makers are unaware of the implications.
The only questions are how long the denouement of the dollar reserve
system will last, and how much more damage will be inflicted by new
rounds of quantitative easing or more radical monetary measures to
prop up the system.
Whether prolonged or sudden, the transition to a stable monetary
system will become possible only when the shortcomings of the status
quo become unbearable. Such a transition is, by definition, nonlinear.
So central-bank soothsaying based on the extrapolation of historical
data and the repetition of conventional wisdom offers no guidance on
what lies ahead.
It’s amazing that there is no intelligent discourse among policy
leaders on the subject of monetary rot and its implications for the
future economic and political landscape. Until there is fundamental
monetary reform on an international scale, most economic forecasts
aren’t worth the paper on which they are written.
Telltale signs of future trouble aren’t hard to spot. Only a few
months ago, Federal Reserve Chairman Ben Bernanke and a chorus of
other high-ranking Fed officials were talking about exit strategies
from the U.S. central bank’s bloated balance sheet and the financial
system’s unprecedented excess liquidity. Now, those same officials are
talking about pumping more money into the system to stimulate growth.
Risky Targets
And they’re not alone: Six months ago, the chief economist of the
International Monetary Fund, Olivier Blanchard, suggested that raising
inflation targets to 4 percent from 2 percent wouldn’t be too risky.
This sort of talk must grate on the nerves of our trading partners,
China, India, Russia and others, who have accumulated pyramids of
non-yielding Treasury debt. No haven there. Return- free risk may be a
better way to put it. And bickering among central bankers over
currency manipulation and rising trade tensions doesn’t exactly
reinforce one’s confidence in a scenario of sustained economic growth
and a return to prosperity.
The prospects for an orderly unwinding of the extreme posture of
global monetary policy are zero. Bernanke, Jean- Claude Trichet and
Mervyn King, his counterparts in Europe and the U.K. respectively, are
huddling en masse upon the most precarious perch in the history of
monetary affairs. These alleged guardians of monetary stability, in
their attempts to shore up the system, have simply created the
incinerator for paper money. We are past the point of no return.
Quantitative easing may well become a way of life.
No Freak Occurrence
The consensus investment view seems to be that the credit crisis of
2008 was a freak occurrence, unlikely to repeat. That is wishful
thinking. Monetary policy has painted itself into a corner. Based on
our present course, there will be more bubbles and more meltdowns.
Financial markets and institutions sense trouble, as reflected in the
flight to supposedly safe assets such as Treasuries and corporate-debt
instruments with paltry yields, as well as the reluctance to lend by
commercial banks. We are stuck in an epic liquidity trap. The irony
is, if global central banks succeed in creating inflation, the value
of these safe assets will be destroyed. It is a slaughter waiting to
happen.
In the pedantic mentality of central bankers, their playbook creates
just the right amount of inflation. As inflation accelerates,
consumers will spend to get rid of their dollars of diminishing value
and spur the economy. Once consumers start spending, it will be time
to raise interest rates because a solid foundation for prosperity will
have been established, they say.
Slender Thread
But whatever the playbook promises, the capacity of financial markets
to overshoot can’t be overestimated. The belief among policy makers
and financial markets in the possibility of this sort of fine-tuning
is preposterous, but it is the slender thread on which remaining
investment and business confidence rests.
The breakdown of the monetary system will be chaotic. When inflation
commences, it will be highly disruptive. The damage to fixed-income
assets will seem instantaneous. Foreign-exchange markets will become
dysfunctional. The economy will become even more fragile and
unpredictable.
Gold is an imperfect, but comparatively reliable, market gauge for the
extent of current and future monetary destruction. The recent
acceleration in the dollar price of the metal to $1,381, a record high
in nominal terms, coincided with talk of a new round of quantitative
easing and highly visible discord among major nations on trade and
currency-valuation issues.
Naysayers’ Bubble
Naysayers point to gold’s price and see a bubble, without
understanding that the only acceleration that is taking place is in
the rate of decline of paper currency. The Fed is organizing an attack
on the dollar’s value, believing that this is the most expedient way
to defuse deflationary market forces. The man in the street is
unaware, a perfect setup. Inflation can only be successful when the
public doesn’t see it coming.
The sudden torrent of commentary on gold isn’t the sign of a bubble.
Anti-gold pundits provide a great service to those who grasp this
historical moment: They facilitate the advantageous positioning of the
one asset most likely to be left standing when the dust settles.
(John Hathaway is a managing director of Tocqueville Asset Management
LP in New York. The opinions expressed are his own.)
To contact the writer of this column: John Hathaway at
JHathaway@Tocqueville.com
To contact the editor responsible for this column: James Greiff at
jgreiff@bloomberg.net
Get out of the way before it falls on you! (Self-Sufficiency)
Source: http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-scary-actual-us-government-debt/article1773879/
Neil Reynolds
The scary actual U.S. government debt
OTTAWA— From Wednesday's Globe and Mail
Quantitive Easing = Inflation
Boston University economist Laurence Kotlikoff says U.S. government
debt is not $13.5-trillion (U.S.), which is 60 per cent of current
gross domestic product, as global investors and American taxpayers
think, but rather 14-fold higher: $200-trillion – 840 per cent of
current GDP. “Let’s get real,” Prof. Kotlikoff says. “The U.S. is
bankrupt.”
Writing in the September issue of Finance and Development, a journal
of the International Monetary Fund, Prof. Kotlikoff says the IMF
itself has quietly confirmed that the U.S. is in terrible fiscal
trouble – far worse than the Washington-based lender of last resort
has previously acknowledged. “The U.S. fiscal gap is huge,” the IMF
asserted in a June report. “Closing the fiscal gap requires a
permanent annual fiscal adjustment equal to about 14 per cent of U.S.
GDP.”
Without drastic reform, Prof. Kotlikoff says, the only alternative
would be a massive printing of money by the U.S. Treasury – and
hyperinflation.
Full Article at Source.
