The US and world economies have already received a good stiff dose of inflation,” our friend Nate Lewis tells us.
“It could be remedied by appropriate action by the Fed and other central banks. In practice, this would likely mean rate hikes, although there are other, more effective methods. In 1969, to counter incipient inflation, Fed chairman William McChesney Martin took action that drove short-term rates to 10%. In 1974, Fed chairman Arthur Burns’ anti-inflation policies took rates to 13%. In 1980, Fed chairman Paul Volcker’s anti-inflation policies took rates to 14% or higher. In 1989, Fed chairman Alan Greenspan’s anti-inflation policies took rates to 9.5%. The political support for such policies today is virtually nil, especially considering the wave of adjustable-rate mortgages coming due over the next three years.
“Indeed, many Fed-watchers have expected the Fed’s next move to be a reduction in policy rates. Whether this turns out to be correct or not, this expectation alone suggests that the trend toward further decline in dollar value will continue. It may not show up in the dollar/euro or dollar/yen rate – the dollar didn’t fall much against foreign currencies in the 1970s either – but it would show up in the dollar/gold rate. Following our worn – but useful – 1970s roadmap, a move to USD$1000/oz. or beyond would probably be accompanied by a blooming of full-on 1970s-style inflation. It could happen by the end of this year.
“Gold never really ‘goes up.’ It simply holds its value while the values of other things are collapsing due to inflation and currency devaluation. Many times, in the 1960s or 1990s for example, it is the most useless of assets, sitting inert and generating no income. In inflationary periods, this inertness of value is gold’s most admirable quality.
“It seems these days like a lot of people can’t help blurting out the H-word – hyperinflation. I am one of them, and I notice that the normally levelheaded Marc Faber has his episodes as well. We are far from such a scenario at this time, and by any reasonable standard, the likelihood of such an outcome remains extremely remote. I take this premature anxiety as a sort of premonition, the way some people feel an earthquake in their knee before it happens. There is something going on that we haven’t seen before.
The U.S. dollar is apparently being rejected worldwide, partially as a result of the unpopularity of U.S. foreign policy. How this all plays out remains to be seen, but a certain amount of preparation might be worthwhile if that tingling-knee thing turns out to be right.”
Markets and Money