Copyright 2012 by John T. Reed

Obama reappointed Fed chairman Bernanke to a 4-year term in 2010.

Romney recently said he would not reappoint Bernanke if he is elected.

Bernanke announced on 9/13/12 that he will start buying $40 billion of U.S. bonds per month and keep doing it until unemployment goes down to acceptable levels.

Democrats exulted. Bernanke denies he is playing politics.

This is called Quantitative Easing III. That is a euphemism for “printing” money, which is the way the money supply in increased these days. It means the Fed is buying U.S. bonds with money it conjures out of thin air. It is almost identical to a counterfeiter conjuring money with paper and ink and has the same effect: it makes the purchasing power of the dollar go down.

If that lowers unemployment, why didn’t it work in QE I and II?

Bernanke implies this action, which previously would have lowered interest rates, will increase employment. There is little evidence of that. Rates are already about as low as they can go. And prior lowerings have not increased employment in the last four years.

Liquidity trap

The U.S. appears to have put itself into a liquidity trap. That is what happens when you lower interest rates as far as you can and it has no effect because unlike when interest rates go from, say, 10% to 7%, going from 3% to 2% does not increase borrowing and thereby economic growth.

Japan has been in a liquidity trap they call “The Lost Decade” since 1990.

Whatever the effect on employment, the effect on inflation is well known

Lower interest rates hurt certain groups—savers, seniors, banks, non-profit endowments—in two ways: they have less income from their dollar-denominated savings and their dollar-denominated savings are at risk of becoming worthless because of hyperinflation. More important, Quantitative Easing III could trigger an economic crash—caused by hyperinflation—that would almost certainly be worse than the Great Depression. Bernanke is ignoring that risk.

Crying wolf or avalanche in the making?

Some may figure predictions from me and others that Quantititave Easing I and II and now III will cause hyperinflation are the boy crying wolf.

Nope. It is analogous to snow accumulating on the top of a mountain prone to avalanches. Based on past experiences, authorities have built a pole that has marks showing snow depth. The point at which past snow levels caused avalanches has a red line. If and when the snow accumulates above the red line, it does not mean that the red line was wrong or that snow piling higher and higher does not cause avalanches. It means that the probability of an avalanche is getting higher and higher as is the severity of the avalanche when it finally happens.

Velocity

In avalanches, whether a given depth of snow will result in an avalanche or not is determined by the details of the snow and weather conditions. Similarly, whether a given money supply will cause hyperinflation is determined by factors like velocity and currency conditions in other countries.

It is well known, that Americans and American institutions have lately been paying down debt and hoarding cash. That is lower velocity and it cancels out an increase in the money supply.

Less well known is that currency velocity can change from zero to warp speed in minutes. And that is probably what will happen. See my web article on the Day the Dollar Dies that depicts what it will probably be like when that happens.

Fleeing worse currencies to get into U.S. dollars

Also, right now, there is fear of the local currencies becoming worth less in the Euro Zone, Iran, China, Britain, Third World countries, Latin America. This is causing owners of those currencies to flee to what they perceive to be safer currencies like the U.S. dollar, the Swiss franc, Danish and Swedish crown, Australian dollars, and a few others. People fleeing into the dollar cancels out the Fed’s increases in the money supply. But as with velocity, purchase of U.S. dollars by foreigners seeking a safe haven can reverse course worldwide in minutes. And sooner or later, it will.

The fact or perception that the U.S. dollar is currently safer than the euro or pound does not mean that the U.S. dollar is safe or safe enough. Better than lousy can still be lousy. And it may well be that the U.S. dollar is not now better than the euro. Rather, citizens of the world are still going on past history when the U.S. dollar was, indeed, one of the strongest currencies on earth. They are falling prey to boiling frog or salami slice syndrome: failing to see how much the financial condition of the U.S. has deteriorated because it happened gradually.

In response to the announcement of QE III, Egan-Jones Ratings Co., which I never heard of, downgraded the credit rating of the U.S. from AA to AA-. They said,

From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8% [of GDP]. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5% [of GDP].

‘Print’ money or cut spending

Fundamentally, the problem is the U.S. federal government is spending more money that it has or can ever get. It currently does that by borrowing from the bond market and by the Fed “printing” money. In 2011, 61% of the deficit was financed by the U.S. Fed buying U.S. bonds. Eventually, the real bond market—mainly U.S. citizens and institutions followed by foreign bond buyers like China, Japan, and most other countries—will stop buying U.S. bonds because they are too risk. I got rid of mine in 2010. Those who still buy them are nuts.

Once the bond market stops buying them, the Congress and president will have only two choices: “print” money by having the Fed buy bonds with money conjured out of thin air or cut spending around 40%. “Printing” will cause hyperinflation.

‘You’re on your own’

Obama condemns Republican efforts to reduce government spending and regulation as telling Americans, “You’re on your own.”

In fact, what the Democrats are doing, with way too much acquiescence by the Republicans, is the ultimate “You’re on your own.” They are going to destroy the value of the U.S. dollar, and thereby the non-home-equity life savings of hundreds of million of Americans and many foreigners, and along with it, the U.S. economy. You will then be on your own to try to live off your hard assets and foreign currencies in a country—the U.S.—with no viable legal currency. Your Social Security monthly deposits will buy you absolutely nothing, as will your bank accounts, certificates of deposit, corporate bonds, and so on. You will be using your silverware, jewelry, and other valuable personal property to buy groceries.

Since you are, in fact, on your own, you’d better learn how to survive and prosper under the coming financial circumstances. I sold out of my book How to Protect Your Life Savings from Hyperinflation & Depression.

$34.95

 

I sent the updated second edition to the printer yesterday. It should come out in early October, but I will not take orders until I have a more definite date. By federal law, I have to ship within 30 days of taking the order so I will not take orders until I am sure I can do that. In the meantime, I recommend you read my recent headline news articles on protecting yourself from the coming hyperinflation.

There are no grown-ups in DC or Wall Street protecting you. You had better start being your own grown-up fast.

John T. Reed