November 8th, 2010 by Dissolving Dollars
The Federal Reserve finally announced the next official round of dollar devaluation (quantitative easing/money printing). Any brief hopes that the Federal Reserve was going to protect the purchasing power of the dollar started eroding in August. The question now is, what does this new round of money printing really mean? Well, I’ve broken it down into three main possible categories: conspiracy, incompetence, or desperation.
Conspiracy: if what the Fed is doing is an authentic conspiracy, then there are many different scenarios that could unfold. Although conspiracy could entail a fake-out, overall, conspiracy mostly means inflation. By inflating away the value of the dollar, that will act as a tax on all people holding dollars; it will pay for government debt and act as a subsidy for banks teetering on insolvency. Also, inflating away the value of the dollar will mean higher foreign profits for those companies and people doing business overseas.
Incompetence: if what the Fed is doing is authentic incompetence, then that means that the Federal Reserve is operating off a completely unreal model of how the economy works and fighting phantom deflation. As a result of such incompetence, inflationary expectations could get out of control and cause a major retreat out of the dollar and into hard assets and stocks. So, incompetence is mostly an inflationary scenario. If the Federal Reserve keeps turning to quantitative easing as the solution to the economic situation, we could see Dow 20,000 and a 50% devaluation of the dollar.
Desperation: if what the Fed is doing is authentic desperation, then that means the deflationists are right and that the dollar can handle a lot more quantitative easing before it becomes truly inflationary. As a result, that would mean the asset inflation we are seeing now ($1400 Gold, $27 Silver, $11500 Dow) is based on false inflationary expectations, and that, due to debt destruction, deflation is still roaring behind the scenes. Desperation doesn’t mean Dow 2000, but it also doesn’t mean Dow 20,000. Desperation could mean a more steady state of flip-flopping between deflationary expectations (like we saw during the summer) and inflationary expectations (like we’ve seen since September). And in the big picture, desperation could all just be about propping up the government, which has taken over the burden of keeping the debt pyramid scheme going. The last thing the government needs is rising interest rates on its debt. And after the November election, it became clear that no spending cuts or tax increases were likely any time soon. Technically, monetizing government debt is better than paying interest on debt. Seeing as the government debt is the base supply of money to begin with, it is the only debt that only grows without ever being repaid.
All I know is that regardless of what the reality of the situation is, people are making bets on their perceived realities. Some people continue to get out of dollars while some people are actually easing back into dollars. Unfortunately, all our economic data is suspect. And the economy is at the whim of a few people in power at the Federal Reserve. If there are enough people who believe opposite things, many markets may head in non-correlating directions. Those who have no more money than what they spend are actually lucky in a way these days. Because trying to figure out what to do with saved money right now is a conundrum. Do you put it in gold even though it is at a record high? Do you put it in the stock market even though the fundamentals of the economy aren’t very bullish? Do you send your money into foreign markets and assure that the American economy will be short the money it needs to recover and pay off debt. If I had to sum up what the Fed is doing with its current policies, it would be this: The Fed is forcing people to chase rainbows.
