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
How to Protect Your Site from Bots & Spam? - 20th Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 20th Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 20th Aug 19
The Gold Rush of 2019 - 20th Aug 19
How to Play Interest Rates in US Real Estate - 20th Aug 19
Stocks Likely to Breakout Instead of Gold - 20th Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 20th Aug 19
Holiday Nightmares - Your Caravan is Missing! - 20th Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
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
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

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

US Fed Inflationary Money Printing Intervention Does More Harm than Good

Economics / Money Supply Dec 17, 2007 - 01:37 AM GMT

By: Michael_Pento

Economics Crying All the Way to the Bank - The Fed has angered many and pleased few in its ongoing effort to unclog the credit markets. They have lowered the Fed Funds rate a total of 100bps to 4.25% in the last three meetings and have also taken the Discount rate down to 4.75%. Most market pundits clamor for the Fed to ease more aggressively in an attempt to bolster flagging market returns. Meantime, an increasingly rare strategist argues for a stable currency and low inflation. In light of the recent actions by our Central Bank, I thought it important to lay out the reasons why it would be better for our economy if the Fed allowed the free market to work.

First let's make it clear what the Fed does when it intervenes in the market. When the Fed wants to expand liquidity, it effectively prints new money by purchasing bonds from dealers in banks. This has the effect of increasing the money supply while lowering the cost of funds. This process ignores the fact that money residing in the banking system should exist from deferred consumption (savings), not by fiat. Increasing the amount of money artificially results in ersatz savings and is always inflationary.

So why the tears?   They are for savers, people who live on a fixed income, and for those whose occupational salaries do not keep up with inflation. It is inflation that is the enemy, an enemy more pernicious than any recession elected officials fear.

Two of the hallmarks of a country's strength are its savings rate and the viability of its middle class. During the beginning of the Reagan era, consumers had an 8% savings rate of disposable income. After turning negative for two years, it now stands at near zero. After all, why should we be a nation of savers if the purchasing power of our dollars will be eroded by inflation? In that case, it is much better to be a debtor.

The average income in the U.S. has also been stagnant recently. According to IRS data, the average American consumer earned less in 2005 than in the year 2000. Not all Americans are affected in the same manner, however. Since the early 1960's, the top 1% of  households have increased their net worth more than 50% over the median wealth in the United States . The main reason for the developing chasm between the classes is clear: poorer Americans hold less of the assets and investments that increase in value when the dollar is depreciated. They also tend to hold occupations in the low paying service sector, whose salaries do not increase with the cost of living. In the long term, it is better to have most Americans' standards of living increase rather than just a select few, and it is a stable and sound currency that allows this to occur.

If you don't believe we have an inflation problem, just look at the facts. The official inflation numbers from the Bureau of Labor Statistics indicate that C.P.I. increased 3.5% Y.O.Y. from October 2006-2007, nearly the level at which President Nixon imposed price controls in August of 1971. Looking at the monetary aggregates, we see MZM (M2 - time deposits) currently rising at over a 15% annualized rate and M3 rising at an annual rate of 17%-- well above the levels experienced in the late 70's and early 80's. This inflation has caused the USD to fall 8.5% against the basket of our six biggest trading partners. The dollar has also lost ground against gold, of course, boosting the precious metal by 22% YTD.

Wall St. continues to cheer for another rate cut to boost nominal returns in the major averages. However, if you adjust the S&P 500's return of 4.2% YTD and the Dow Jones return of 7.8% YTD for the falling dollar, the real returns are decidedly negative. An owner of the Dow Jones Industrial average would find that his holdings buy fewer ounces of gold than they did at the beginning of the year. Investors must remember that nominal returns are unimportant; it is the purchasing power of those returns that matter. It makes no difference if the Dow goes up 100% and the dollar is down 50%: the net result is that you have gained nothing.

To believe that monetary stimulus from the Fed provides a panacea for the markets is to be ignorant of history. Monetary inflation has always led to mal-investment and financial stress. There exists no method of safely removing the excess liquidity once it is provided. Attempts at removing liquidity have always led to a recession. However, the severity of the recession increases as each opportunity to bring the markets into reconciliation gets postponed.

My clients will continue to own inflation-protected assets in order to thrive in this environment of monetary excesses. However, these gains come at the expense of those who are unable to extricate themselves from the quicksand of a falling currency. And it is for them that I weep.

*NOTE: I also discuss inflation as a guest in the final segment of this week's edition of the Market Neutral podcast .  Click the link to listen!

By Michael Pento
Senior Market Strategist
Delta Global Advisors, Inc.

A 15-year industry veteran whose career began as a trader on the floor of the New York Stock Exchange, Michael Pento served as a Vice President of Investments at Gunn Allen Financial before joining Delta Global. Previously, he managed individual portfolios as a Vice President for First Montauk Securities, where he focused on options management and advanced yield-enhancing strategies to increase portfolio returns. He is also a published theorist in the field of Austrian economics.

Michael Pento Archive

© 2005-2019 - 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