Wednesday, June 10, 2009

ObamaFlation and Madoff to the Nth Power

Arthur Laffer:

...About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion

...The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 ...It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless

As to the effects:

With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and [later], higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It's a catch-22.

What the Fed did was cooperate with--or facilitate--the politicians.

...the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

What the Fed and the politicians are trying to do is make things appear to be fine. And for the time being, that will work; the deflation in housing will paper over the inflation the Fed and the politicians are creating.

But that will only work for a very short time (as you note from the continual erosion of 10-year bond prices and the uptick in commodities such as petroleum, gold, and copper.)

Then all Hell will break loose.

Personally, I'm investing in three commodities: lead, brass, and gunpowder.

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