Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Out of Control U.S. Government Spending Means It's Time to Hedge Against Inflation

Commodities / Inflation Feb 25, 2013 - 12:24 PM GMT

By: Money_Morning

Commodities

Jeff Uscher writes: Uncontrolled government spending could force the Fed to monetize the government's debt, creating runaway inflation, former Federal Reserve Governor Frederic Mishkin warned in a report.

If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.


In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.

The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."

The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.

This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.

Will Politicians Make a Deal Before it's Too Late?
The report notes that, despite record amounts of government debt, interest rates remain near all-time lows. That is due to the Fed's quantitative easing policy, which has artificially held down interest rates by purchasing long-term Treasury notes and mortgage-backed securities (MBS) from its member banks.

This cannot continue indefinitely. Unless Congress can get a grip on spending, the United States faces the risk of "fiscal dominance" where the Fed will be forced to fund the fiscal deficit through inflation.

As we pointed out on Thursday, the Fed is buying $85 billion a month in Treasury notes and mortgage-backed securities from its member banks each month. The Fed also pays its member banks interest on the excess reserves they hold at the Fed.

Mishkin argues that the Fed is "incentivizing" the banks to keep excess reserves at the Fed to prevent that money from increasing the money supply and igniting inflation.

We have argued that, under the Fed's zero-interest-rate policy (ZIRP), banks are unable to charge enough interest to cover the risk of lending money to businesses and consumers so they are happy to keep their money as excess reserves at the Fed.

Either way, the result is the same. The Fed is buying long-term debt from the banks and exchanging it for overnight money.

"Any swap of long-term for short-term debt in fact makes the government more vulnerable to ... a fiscal crunch, namely, more vulnerable to a self-fulfilling flight from government debt, or in the case of the U.S., to a self-fulfilling flight from the dollar," the report stated.

Why the Government Makes Money Off of the Fed
The expansion of the Fed's balance sheet through quantitative easing means the central bank earns a lot of money - $88.9 billion in 2012 - in interest, which it passes on to the government. If the Fed decides to end quantitative easing, its balance sheet will shrink and, assuming interest rates do not rise much, the Fed's contribution to the national budget will decline.

Mishkin and his co-authors argue the Fed could come under pressure from Congress to slow or delay the end of quantitative easing so the revenue from the Fed's bloated balance sheet will not decline.

If the federal government continues to pile up debt, then the Fed will be forced to monetize the debt - create new money to buy new government debt - or else interest rates could move sharply higher.

As interest rates rise, more of the federal budget will have to go toward paying interest on the growing debt, leaving less for everything else and increasing the risk of default.

Remember, as interest rates rise, bond prices fall. That means the Fed will be booking losses on all the Treasury notes and mortgage-backed securities it has purchased so far. The report's authors fear these losses could even exceed the Fed's capital.

For any other bank, that would mean bankruptcy. However, the Fed can create as much money as it needs. But that is monetization and that is likely to ignite runaway inflation and a flight away from the dollar.

How to Hedge Against Inflation
Unless you trust Congress to get its act together and come up with a long-term plan to bring spending under control, your best bet is to hedge against inflation by buying gold or other hard assets and selling short long-term U.S. Treasury notes.

The SDPR Gold Trust (NYSE: GLD) is trading just above major support around the $150 level, which could be a good entry point. Other precious metals, including silver through the iShares Silver Trust (NYSE: SLV) or platinum though the ETFS Physical Platinum Shares (NYSE: PPLT), would be good alternatives.

To short long-term U.S. Treasury notes, there are a number of ETFs that trade inversely to long-term Treasuries, including ProShares Short 20+ Year Treasury ETF (NYSE: TBF), which goes up when long-term U.S. Treasury notes go down in price (up in yield).

The ProShares Ultra Short 20+ Treasury ETF (NYSE: TBT) is a leveraged ETF that aims for twice the return of TBF. Direxion Daily 20+ Year Treasury Bear 3x Shares (NYSE: TMV) seeks three times the inverse return on the NYSE 20+ Year Treasury Bond Index.

For more about how the Fed's policies will affect your money, check out yesterday's report: What Every Investor Should Know About the End of QE

Source :http://moneymorning.com/2013/02/22/with-unchecked-u-s-spending-its-time-to-hedge-against-inflation/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules