In recent statements made by federal reserve chairmen, “Helicoptor Ben” said he would continue to goose the economy with the $600 billion Treasury bond buying program. Despite reports that the program would be cut short due to a strengthening economy we know this simply isn’t possible. The federal reserve must raise the debt ceiling and debase the currency in order to bailout state budget deficits, pension funds, social security and bad debt held by banks and consumers.

“If output is too low and unemployment is too high, then that would be a situation that requires more stimulus.” – Ben Bernanke

Not only do we believe that QE2 will be carried out in its entirety, but we also believe QE3 is already on the table. Rising interest rates on our massive debt load would be catastrophic, as would a failure to raise the debt ceiling for the US government. All of the liquidity injections and bond purchases are destroying our currency. Paying attention to the price of gold and the chart below will help you understand how close we are to piercing through key technical levels.

Dollar Devaluation and Inflation

Although prices haven’t immediately risen, inflation is alive and well. By nature inflation is caused by an increase of the money supply or a large change in supply and demand for goods.  Simply stated, increasing money supply  always causes inflation because the underlying currency is devalued. Currency devaluation is very negative, despite what you might have been told. Devaluation through inflation steals from people who save their money. At the same time debtors are rewarded since the debt owed is  devalued. Worse yet, inflation and devaluation discourage savings and encourage spending. Hence the reason, both tactics are used during weak economic periods of time.  This key point also explains why Ben Bernanke has chosen to trash the dollar – the average US consumer is heavily saturated in debt.

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US Dollar Carry Trade Beginning

Up until recent months the Japanese Yen was the currency of choice for the Carry Trade. For those who don’t already know, a carry trade exists when one country has much lower interest rates than other countries. The country with low interest rates buys up currency and assets of other countries with higher interest rates in order to achieve a better return.  With the recent decrease in US interest rates the Yen Carry Trade is unwinding and the new US Carry Trade is starting.  Now countries like Japan are selling the US dollar and buying back stronger currencies and assets. This unwinding process will put even more pressure on the US Dollar.

Trapped Inside a Box

Nothing has changed from a fiscal perspective in relation to the federal reserve. While the Obama administration boasts a policy of change, nothing has changed for the federal reserve. Ben Bernanke is well on his way to an unprecedented dollar destruction with Alan Greenspan at a distant second. Current policies could easily result in the most sever dollar destruction in history. With the economy still being fragile despite massive stimulus and spending, further dollar dilution will surely be on the way. After all, the federal reserve is trapped inside a box. If they let interest rates linger this low for long periods of time hyper-inflation will occur. If the fed tightens monetary policy to defend the dollar, the economy will go into a deflationary recession. We know this scenario won’t occur since Bernanke once stated that he would rather drop money from helicopters than suffer another deflationary depression. In either scenario bad consequences exist for the economy.

Consequences of Inflation

• Increased money supply is always inflationary
• Inflation steals value from existing currency
• Inflation helps debtors – hurts savers
• Commodity prices increase
• Middle Class and Poor Lose
• Upper Class Wins

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