Analyst Jim Puplava has recently published Illusions, an essay on the coming financial storm. Puplava’s view is that the widespread consensus that the Fed will embark on a rate-tightening cycle is mistaken. The financial markets have in essence become addicted to easy credit and low interest rates. Excessive amounts of debt have been funded by money creation at these low rates, and an increase in rates would be devastating to financial institutions, the mortgage market, and the GSEs.
Instead, Puplava argues, we are headed toward a hyper-inflationary currency collapse as the FEd tries to monetize the debt in an effort to avoid a debt-defaulting domino chain collapse.
- As long as the present fiat money system exists without the backing of gold or silver, governments and their respective central banks will continue to spend more money than they take in. What they can’t politically finance through higher taxes, they will finance through credit or by printing money. This means we will experience inflation somewhere in the economy or the financial markets. Indeed as Mr. Bernanke has reminded us on numerous occasions, the central bank can print unlimited amounts of money, use other extraordinary measures, or intervene directly in the financial markets to prop up asset prices—be that bonds, stocks, mortgages, or real estate.
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–But this is the way it always is: First inflation is detected. It is measured in many different ways, each leading to a different figure, but inflation is undeniable. Each pundit shows a different projection of how long it will take before the US$ may be valued at zero.
As a result, people rush to exchange dollars for goods (or services).
Then, the Federal Reserve raises rates as much as it can to combat the inflation and to slow the deterioration of the currency. More inflation occurs. More tightening. The attempt is to stabilize the value of the currency by opposing two disastrous forces against each other so that they “balance” and no disaster ever occurs.
Something like the immovable object vs. the irresistable force.
It is as though you were in a rocket whose engines have been accidentally activated, hurtling you away from the earth without food or water for the journey. Before leaving the atmosphere (passing the point of no return),you manage to cut the engines, whereupon you begin falling backwards towards the earth because of gravity. You activate the engines to avoid colliding with the earth. Upon finding you are again climbing higher, you cut the engines. Again, you fall backwards. Ideally, you would achieve to stand still, suspended in space. Nobody thinks you can achieve this stationary condition, but even if you could achieve it, it clearly would not last forever. And even if you find a formula that is forever repeatable, remember that you have no food or water and that fuel must become depleted before you can back all the way down slowly.
Those on earth can place their bets on whether you will end up starved in outer space or crashed into the earth, but clearly things will end one way or the other.
Keynes was not the first to observe that we all end up dead, but he may have been the first to infer from that fact that it is okay for our currencies to do so as well.
On a different subject: How can the Fed “intervene directly to prop up asset prices”? Does this just refer to the inflationary phase I have spoken of above?
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