Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Fed Massive Injections of Liquidity to Fuel Surging Inflation

Interest-Rates / Inflation Jul 31, 2008 - 02:28 PM GMT

By: Michael_Pento

Interest-Rates

Best Financial Markets Analysis ArticleIt amazes me how many investors are now concerned about a deflationary spiral occurring in commodity prices. They site oil prices that are slightly off all time highs or a falling CRB index as their examples. While it is true many commodities are off historic highs, it is hardly reasonable to project a continuation of falling asset prices given the state of the banking sector and the consumer.

I know that sounds counterintuitive given the current state of the credit crisis, but it is exactly that crisis and the Fed's response to it, which will soon forge the path to inflation rates the likes of which have never before been experienced in this country's history. The most important question investors must ask themselves is how inflationary is the current 2% Fed Funds rate?


In a real economy, low interest rates are the product of a high savings rates. When consumers defer consumption, banks find themselves flush with cash, they then lower rates to attract consumers to take on new debt. Likewise, when banks are short on funds they raise rates in order to preserve capital. This is the natural flow of interest rate cycles. But under a fiat currency system, as we made the mistake of embracing in 1971, all logic leaves the system. To give you a historical perspective, look at the chart below of the Fed Funds rate since 1958.

Source: TradersNarrative.com

We see from the above chart that the key overnight lending rate is at its lowest point since the years immediately after 9/11. And before that emergency rate was achieved, you have to go back to 1962 to find a commensurate level. It is important to remember that 46 years ago we did not have a 100% fiat currency system, so the 2% rate was a much more realistic and natural level of interest to charge. Notice most importantly, the long term trend of falling interest rates after Paul Volker took rates above 18% in the early 80's. His mission was clear, to absorb the excess liquidity in the banking system and economy.

The next chart below shows our love affair with consumption and debt rather than savings. Keep in mind the government seems to want to promote more of this behavior at any cost. For example, this summer's stimulus checks were unpaid for and temporary in nature. Since producers don't change long term production plans, these temporary gimmicks only promote inflation and increase deficits. In fact, recent official projections are that the deficit will reach $490 billion in 2009.

Source: Federal Reserve Bank of Kansas City

The key metric here is that total debt as a percentage of disposable income was a mere 60% back in 1962. Today, we have debt levels at an all time high of 135% of disposable income and growing at unprecedented rates. The Fed must be very careful not to have rates rise too high and choke off the ability of consumers to service their debt.

The last two charts below show the decline in the personal savings rate. The first shows the decline from 1950-2005 and the second is a close up view of the last 8 years. This illustrates just how artificial and inflationary a 2% Fed Funds rate is.

Source: US Department of Commerce

Source: US Bureau of Economic Analysis

According to the National Income Product Accounts (NIPA), we find that back in the early 1960's consumers saved about 8% of their disposable income. During the early 1970's it averaged about 9.5% and in the early 1980s it averaged close to 10.5%. Today we save about zero % of our after tax income. The savings trend of the American consumer is in a free fall yet we find that interest rates have followed that downtrend lower!

These statistics hammer home the point of how unrealistically low a 2% funds rate is today. It can only be achieved by massive injections of fiat money printing from the Federal Reserve. Since consumers are mired in record debt and are not adding to their savings, the Fed has been the sole provider of banking liquidity.

We have seen this play before. After the bursting of the equity bubble in 2000, the economy entered a slowdown that was combated by the Fed with a 1% Funds rate. A short and shallow recession ensued but was followed by the biggest bubble in our history—the real estate frenzy. While it is possible commodities may experience a continued pullback after their record advance, I believe it should be welcomed as an opportunity to purchase them at bargain prices. These ersatz interest rates have always led to inflation and will continue to do so to an even greater degree in the future.

Those that are in charge of our economy have come to the conclusion that the only way out of the collapse of this latest asset bubble is to create another one. This time however, the consumer is completely without any added savings. Therefore, the ridiculously low rate of 2% is more inflationary than at any time in our history. The Fed has come to believe that the economy cannot tolerate a real interest rate because debt on the private and public level has become intractable. Knowing this, can you really start believing in a 1930's style deflation? Protect yourself by owning something the government can't devalue by decree. Unless the government perfects alchemy, buy gold.

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
mpento@deltaga.com
www.deltaga.com

With more than 16 years of industry experience, Michael Pento acts as senior market strategist for Delta Global Advisors and is a contributing writer for GreenFaucet.com . He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

Michael Pento 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