“While the markets can operate on false scenarios for a significant period of time, reality always wins in the end. When it does, the situation can get quite ugly and all the profits gained from a belief in an unsupportable viewpoint can evaporate over night. At the moment, there is a lot of denial about inflation and investors should be paying attention to this.”-Daryl Montgomery, Independent Trader
People need to start studying up on basic economics. What the G7 and the U.S. Federal Reserve are doing will lead to catastrophe, for the little guy.
After an emergency meeting on August 7, the Group of 7 most industrialized countries decided to deal with the growing debt crisis, of Europe and the United States, by flooding the markets with cash (liquidity). One way to do that is to buy massive amounts of bonds, which is what the European Central Bank (ECB) did.
Following the G7 meeting the ECB began buying up Italian and Spanish bonds, even though the week before Germany was advising against such a move, because Italy and Spain were too bad off to be trusted to pay them back.
Injecting cash into markets, like buying up bond issues, can have the same result as overprinting money; hyperinflation. The most recent case of hyperinflation took place in Zimbabwe. It lasted from 2004-2009, and is considered the second worst case of hyperinflation in the world. It happened after their economy crashed, and the government responded by overprinting money (by the way the U.S. has been overprinting money for years now).
In a statement, the G7 (which includes the United States) tried to say their move to flood markets with cash will work as long as government fiscal policy remains “disciplined”. There was no clarification what they meant by “disciplined”, but surely they mean that as long as governments, mainly European, continue to cut spending and increase taxes to pay their government debts, then hyperinflation should not be a concern.
Why would that be? Possibly because so many people are out of work, which reduces the flow of money in the consumer markets, and, increased taxes reduces the amount of spending money a consumer, who still has a job, has. Also, cutting government spending is another way to reduce liquidity in the consumer markets.
But flooding markets with cash isn’t the only way to create hyperinflation, keeping interest rates low can do the same thing. And keeping them artificially low for long periods of time will only make things worse. That’s exactly what the U.S. Federal Reserve (a privately run central bank) is doing.
On August 9, the Federal Reserve (incorrectly referred to as The Fed, incorrect because it’s not a government agency. The Fed, or Feds, usually refers to a government agency, in fact it used to refer to the FBI), announced it would keep interest rates low, again. Not only that but they would so so until 2013, with the possibility of lowering it even more.
The interest rate, that the mainstream media is always talking about but surely doesn’t understand, is the Federal Funds Rate. This rate does NOT affect us little guys. It is the interest that banks pay each other for borrowing money from each other. Only in theory does it “trickle down” to us little people in the form of lower credit card and loan rates, and even supposedly on the interest rates the banks give us for putting our money into their so called “savings” accounts.
The past decade has proven that keeping the Federal Funds rate low does NOT “trickle down” to the little guy, working class, consumer level.
And that’s the point. There is nothing being done to help the average John Q Public. Everything is being done to help the big guys, the Man, the elites and their global corporations/governments. Keeping interest rates low for the big guys, and flooding the markets with cash (only for the benefit of the big guys) are short term actions that will result in long term pain for the little guy (as if the little guy isn’t in pain now).
Even investment advisers are warning people of the dangers: “…governments that engage in this behavior frequently go to great lengths to ensure the public doesn’t make the connection and realize that inflation is caused by government actions.”–Daryl Montgomery, Independent Trader
Now, there are some officials with the Federal Reserve that are also sounding a warning. Narayana Kocherlakota, the president of the Federal Reserve’s Minneapolis bank, has been arguing for an increase in interest rates: “Central bankers alone cannot solve the world’s economic problems.”
Kocherlakota wants to raise the Federal Funds Rate by at least a half a percent. He says most of the economic problems in the U.S. are a result of mismatches between the labor market, and employers, and that is something the Federal Reserve can not influence. It’s proof that what Central Banks are doing have nothing to do with solving the bad employment situation.
China seems to be the only country that’s following traditional economic policies regarding the prevention of inflation. So far this year the inflation rate in China has hit 6.5%. China is blaming the slow down in their economy partly on domestic inflation.
China is experiencing inflation because more people are making more money, which means more money available on the consumer market. It’s being exacerbated by foreign banks loaning money to Chinese consumers.
China has instituted policies to restrict the money flow, by making it almost impossible for people to qualify for home loans, and even auto loans. They’ve recently banned certain loans being issued by foreign banks. The Bank of China is also raising their interest rates.
It hurts consumers, only in that it’s much harder to get a loan, but it restricts the amount of money in the consumer market, which is supposed to keep inflation down, which benefits consumers in the long run. Also, if you’re a saver then you benefit by getting higher interest on your traditional savings account.
Bottom line: Low interest rates and flooding markets with cash only benefits the big guys, and only for the short run. In the long run it will hurt everyone.
