Federal Reserve Wants to Debase the U.S. Dollar

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Last week, Mr. Bernanke announced that the Federal Reserve would buy $300 billion worth of U.S. Treasuries and another $700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air.

It is worth noting, that the Federal Reserve has already dropped the Fed funds rate to a historically low range of 0-0.25% and now it is desperately trying to use other unconventional methods (quantitative easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetizing debt is inflationary and confirmation that the Federal Reserve wants to debase the U.S. dollar. It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement.

Allow me to explain:

Suppose your grandparents borrowed $100,000 from their friends roughly 50 years ago. Back then, $100,000 was a lot of money, and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the U.S. dollar, today, $100,000 isn’t a very large sum of money. Therefore, your grandparents would find it much easier to repay their debt.

Turning to the present situation, the United States owes its creditors a gigantic amount of money and a debt so large that it can never hope of repaying it in today’s dollars. So, the United States has two options:

a. Default or bankruptcy

b. Monetary inflation

Given the fact that the United States is still the world’s largest economy, owns the world’s reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the United States will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread!

It is my firm belief that over the years ahead, the United States, and all other debt-laden nations in the West, will engage in massive money- creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor’s best friend, as it makes the debt easier to service and repay.

On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the ‘developed’ nations are up to their eyeballs in debt, you don’t have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the United States is expanding due to rampant borrowing by the U.S. government. So, I don’t expect deflation to take hold; rather, I anticipate accelerating inflation, which has always led to rising asset and consumer prices.

It is worth noting that apart from the Federal Reserve, other nations have also started monetizing their debt. Recently, the Bank of England announced that it plans to buy GBP150 billion worth of its government debt by creating money out of thin air. Needless to say, such a move is inflationary and terrible for the health of the British currency.

Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations that engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power, but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance sheets should skyrocket as a result of inflation.

Last week, in the aftermath of the latest announcement by the Federal Reserve, we have seen significant strength in precious metals, crude oil and grains. Conversely, we have seen a huge decline in the U.S. dollar. If the Federal Reserve continues on this inflationary path, we can expect a resumption of the commodities bull-market and renewed weakness in the U.S. dollar.

Contrary to popular opinion, I am of the view that most commodities and stock markets have seen the lows for the entire bear market and we may be in the early stages of a new cyclical bull market that could last for a few years. Now, I am aware that my bullish stance may lead to ridicule from some of my readers, but I would like to point out that new bull markets are always born during abject pessimism and skepticism. Even if some asset prices break to fresh lows in the near- term, I suspect such a move will prove to be a ‘head fake’ and prices will soon rebound. So if you have a 4-5 year investment horizon, now may be a good time to convert some of your temporarily powerful cash into hard assets (precious metals, energy and industrial metals), related producing-companies and sound businesses in the fast-growing Asian economies.

At the current levels, the energy complex looks extremely attractive and should prove to be a fantastic long-term investment. After years of extensive research, I am convinced that the world’s oil production is peaking and we are likely to see much higher energy prices in the future. So, investors may want to add to their positions in upstream oil/gas companies and the energy service stocks. Finally, it looks as though the precious metals complex is becoming over-heated and long- term investors may want to wait for the usual summer correction before adding to their positions in physical gold and silver.

Regards,

Puru Saxena
for The Daily Reckoning Australia

Puru Saxena
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
Puru Saxena

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Comments

  1. Hmm, you made a great argument that inflation is certainly coming, but you have provided absolutely no support for the idea that the stock market has bottomed out, instead you just threw it out there. I’m not convinced.

    Reply
  2. I think we might also be seeing a bottoming process as far as the stock markets go. All the money being splashed around is going to have some impact, it may not be good value for money but it will help stimulate the economy. In Japan for example the problem was not that low interest rates and government spending was not working,but rather these actions were often reversed too early and the economy fell quickly back in a heap. If you leave interest rates low and keep them there for long enough then economy will get a boost, the problem is of course that as demand picks up inflation will rise, so I guess we will start hearing about the “inflation genie” again soon. Also remember a lot of capacity has been taken out of the global economy; mines and factories shut, oil exploration plans put on ice, workers laid off etc. so when demand does pick up we are likely to run into a few supply bottlenecks as well…this also tends push up inflation.

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  3. Good call there John

    Reply
  4. Of course the US wants to devalue its dollar. It has to do that to rebuild and become globally competitive again re real exports – As opposed to selling bits of dodgy financial paper that the world has wised up to. (And to devalue its international debt.) So what? The USD devalues and Americans use more home made products. And pays its debts in funny money if they get a call on same. Please forgive me but I just don’t see the big deal? (And don’t tell me it is oil/energy – Canada’s got lots and they are just the 51st state.)

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  5. […] Posted by pommysmommy This is an interesting link. Federal Reserve Wants to Debase the U.S. Dollar Great article in economic terms this is called "Open Market Operations" Just a quick […]

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  6. absolute hard core bullshit

    dow jones real value – 100 not 10 000

    no one buys 15 K lawn business for 3 million , why anyone would even consider buying worthless companies at such enormous PE ratios ?

    if it sells over PE 1 and pays no dividend it has fraudulent speculative value
    it is not investment it is a hard core fraud . These perpetrators must be immediately arrested

    Reply

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