A Single Match Of Inflation In An Ocean Of Gas |
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| By: The Rogue Economist | ||||
I'll go further into this in another article, but the decisions of the Fed recently are creating a large disincentive towards local lending. Lenders who had been facing insolvency from mortgage backed securities not being worth the paper they're printed on, quickly had their bottom lines saved by our federal government (and every one of its citizens, via an increase in the debt) once the US agreed to acquire those bad investments at full face value. On top of that, the Fed then opened numerous emergency liquidity floodgates to get the loan companies lending again. However the lenders may not be really in a mood to loan to US citizens these days. There are two reasons behind this. The first being that they are occupied using that money which they've borrowed from the Federal Reserve to acquire US Treasury Bonds, which is helping keep US Treasury offerings running smoothly. (I've a lot to say about that, just not in this posting.) Additionally, the Fed has had interest rates so low that lenders possess little interest in issuing new loans. They simply aren't getting that much of a return of interest. (Most personal investors are confronted with the same difficulty nowadays.) However...foreign investments tend to be offering far better returns right now. And also the foreign currency exchange markets (FOREX) lets them take trade positions at 100 to 1 leverage, so $1 million in capital are able to control and get the gains from $100 million in foreign currency movement. On the other hand, aren't many of the foreign investments a dangerous wager as well? Doesn't the much higher return in, say Greece, really imply that there's a higher potential for default on loans given to them? Yes, but that doesn't matter to the banking companies. The federal government has now shown to the frat boy executives running the banks that daddy will bend over backwards to get them out of any problem that they can get in, plus they have nearly unlimited access to federal money at a near zero percent rate of interest under the Fed's existing ZIRP (Zero Interest Rate Policy) environment, so why shouldn't they load up with whatever they can borrow and go out and capture the biggest returns available offshore? Naturally, this has does have some, shall we say, "unintended" side effects. The deluge of currency coming from our financial institutions in to the currency exchange and foreign bond markets is weakening our US dollar and strengthening foreign currencies. This may not appear to be a big deal at first, but it has the outcome of making their products more expensive to us, which is not the way the game is played. In fact, a large number of our foreign trading partners have invested substantial time and energy to ensure that their goods and services will be affordable for you to purchase. In the game, America plays the endless customer, and our strong US dollar can be used by everyone, so we buy, they produce and sell, and everyone's happy. Neutralizing a torrent of American dollars that's in addition to the typical amount coming from the United States isn't a simple thing. A lot of countries have to face a series of hard decisions if they wish to keep their favorable balance of trade: 1) They can vault the extra US dollars, which takes those dollars outside of the total pool of accessible currency and restrengthens their own foreign money. However they can't spend those US dollars without them becoming active once again, which means that they're stuck with unspendable dollars. (Suppose that a portion of your paycheck needed to be put in a non-interest bearing bank checking account, together with the condition that if you take it out of that account and use it to buy something, you'll quickly get a pay cut from your boss.) Moreover, those vaulted US dollars are only good when inflation doesn't nibble away their value, which appears to be getting increasingly likely considering the on-going actions by the Federal Reserve and government. 2) They can utilize them to acquire American Treasury bills. It's been the primary strategy for sterilizing surplus dollars in the past, due to UST's being backed with the full faith and credit of the US government. This method is looking much less attractive right now, due to several factors. The first of which is the very low rates the US is offering for those American bonds. And they're also having to bid against those American banks who are obtaining practically zero interest loans from the Fed whenever they want to purchase an US Treasury bond. And in the bond world, lots of buyers equates to an extremely low bond interest rate. Additionally, since our interest rates are hovering close to zero at the moment, the only real direction to go in the future is up, and rising interest rates kill the worth of existing bonds. Looking at this, a ten year bond offering a meager 2.6% annual return rate isn't very desirable today. Finally, China has been slowly but quietly selling its extensive holdings of US Treasuries for Euros recently, leading some to think that a dash for the exits could potentially be in the future, which would end up being disastrous for anybody still left holding those bonds. 3) They could print their own money, and then use it to purchase US dollars, which essentially combats the fire of of late created money by the us government with the fire of their lately created currency. After all, if the us can just whip up a mess of currency, then why can't they? This is apparently the least unpleasant choice for many countries at the moment, and is actually the cause of the "currency manipulation" that the US is currently accusing a number of countries of doing. On the surface, it appears optimal. It has the expected result of revaluing the foreign country's currency without requiring them to vault US dollars or buy United States Treasuries. However, there's one little problem with this tactic. You see, all of that extra currency created by both the America and by it's trading companions is going to find someplace to land. It tried to land through affecting the trade balances and forcing the US to spend more for foreign goods, but that was countered, so it's seeking another market where it can be of use. My personal opinion is that this extra currency will find a new home in the commodities markets. Items like oil, copper, gold, silver, palladium, as well as other useful goods which are essential to making nearly everything else are going to experience an upturn of their prices, and in certain cases already have. Every newly created foreign currency note that's now on the market represents US dollars which haven't been removed from the marketplace via other methods, and that dollar sterilization process is essential to keeping the price of real goods from exploding. So, the rest of the world has the choice of either choosing a hit to their income in order to bury those added dollars, or sharing in the inflation that's currently being created as those extra American dollars begin to bid up commodities prices. Oil is easily the most probable target for this inflation, due to it's use within nearly every other production process. And oil is also different in it's capacity to transmit price inflation to the rest of an economy, due once again to its wide use. Right now, OPEC is looking at a price hike of their oil to $100 per barrel, and the market itself may have even more severe ideas in regards to what that price will be. All of the bailouts from recent years are coming back to roost soon, and with the Federal Reserve making some serious noises about needing even more, it's only going to worsen in the near future. Personally, I believe we've now departed from the land of low inflation, and are running headlong directly into "inflation alley" at ever faster rates of speed. NOTE: This article is intended to be editorial in nature, and is not intended to impart investment advice. |
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| Article Source: http://yourfinance.co.za | ||||
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