Wednesday, July 1, 2009
Laffer On the Fed
"Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. ... With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilites of federal programs--such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid--are well over the $100 trillion mark. ... The Fed controls the monetary base [MB], 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position. ... The currency-in-circulation component of the [MB]--which prior to the expansion had comprised 95% of the [MB]--has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the [MB] is a smidgen less than 50% of the [MB]. Yikes! ... Banks now have huge amounts of excess reserves, enabling them to make lots of net new loans. ... The expansion of money, given an increase in the [MB], is inevitable, and will ultimately result in higher inflation rates. ... The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half century. ... To date what's heppened is potentially more inflationary than were the monetary polices of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges", Arthur Laffer (AL) at the WSJ, 10 June 2009, link: http://online.wsj.com/article/SB124458888993599879.html.
I agree with AL. Sell dollars. Buy gold. 'Nuff said. Junior at Junior Deputy has a 16 June 2009 post referring to AL's piece: http://www.jrdeputyaccountant.com/2009/06/ready-or-not-here-comes-inflation.html. Disagreeing with Junior, "it's [only] going to hurt" if you hold US dollar denominated securities. Here I go again, "Got gold? Get more! Got bonds? You fool"! The Mogambo Guru and I must be rubbing off on Junior. She writes "doomed" and makes bold some of Laffer's words I excerpted above.