Inflationomics

Which Way Will the Fed Turn?

Prior to the Fed’s tapering of quantitative easing, I didn’t think it likely that the Fed would actually taper; i.e., reduce its money printing.  I thought that the world had become addicted to the easy money policies of the Fed.  I thought that by tightening the money-printing spigots, the U.S. dollar would strengthen, U.S. exports would become depressed, and U.S. imports would become cheaper, thus worsening the balance of trade.  In short, I didn’t think the Fed would be able to wean the world off the easy money policies it had fostered.  Also…

This just didn’t seem to be in line with the Fed’s prior practices in the currency war in which central banks were expanding their currency supplies in an effort to reduce their purchasing power and thus making it easier for exporters to export.  Yet…

Here we are, well down the path toward strengthening the U.S. dollar and the Dow continues to rise, other currencies (the Euro in particular) continue to falter, and people keep buying the U.S. dollar all around the world.  In part, this could be because the Bank of Japan and the European Central Bank are inflating their currencies more than the U.S. Fed is inflating the U.S. dollar.  Or, perhaps there’s greater demand for the U.S. dollar because the U.S. economy is still perceived as the most stable economy in a world of increased tension emanating from the Middle East and/or Ukraine.  And then there’s the Fed’s threat to raise interest rates at some point in the near future.  Perhaps some people are looking for a higher return on their investments as interest rates rise.  In fact…

You can bet Warren Buffet is.  His most recent deal with 3G Capital for the merger of Kraft Foods with Heinz Company shows faith in the long-term prospects of the U.S. economy.  It also shows a change in the kinds of assets he’s purchasing…instead of intangibles (insurance), he seems to be more interested in tangible assets, like Kraft Heinz Company, that focus on the essentials of life, and on capital intensive assets (Burlington Northern railway) that will become harder to compete against as capital accumulation becomes more difficult.  And then…

There’s Buffet’s vice chairman, Charlie Munger, with some insight into what Mr. Buffet is thinking, when he said recently, “You can count on the purchasing power of money to go down over time. And you can almost count that you’ll have more trouble in the next 50 years than the last.”  And so…

We have to ask ourselves, in the face of lower gasoline prices, 25-34 year olds finding more jobs, and the Dow Jones Industrial Average (DJIA) continuing to defy gravity, what will happen next?

If the Fed actually does raise interest rates, what will that do to large U.S. exporters, the U.S. Treasury, and other U.S. debtors as a result of the higher rates of interest they will be forced to pay?  Will it push them closer to bankruptcy?

On the other hand, if the Fed doesn’t raise rates, or it decides to expand its money-printing policies once again, making it easier for debtors to pay their debts, how will this affect the world’s economies?  Will they eventually become addicted to those easy-money policies as I was expecting some time ago?  Or will they turn to a sound money and another economy based on capital accumulation rather than debt?  Which reminds me…

We have a new entity appearing on the international scene, the Asian Infrastructure Investment Bank (A.I.I.B.), designed to help developing nations expand their infrastructure.  Its primary benefactor is China, a country that has the second largest economy in the world and is the world’s largest creditor nation.  Other nations also want to participate in this new venture.  Against U.S. government wishes, Germany, France, Britain, and Italy all want to work with China in its efforts to finance the developing world.

And who is in a better position to help the developing world grow?  The world’s largest creditor nation, or the world’s largest debtor nation?  Clearly, the largest creditor nation knows better how to accumulate capital, including real money; i.e., gold.

Time will tell.  In my opinion, you can count on a debtor nation to inflate its currency into oblivion…it’s just a matter of time.

Robert F. Sennholz

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