All Money is a Matter of Belief

Investors Alley
All Money is a Matter of Belief

Anyone remember when our
money was backed by gold? Top of the dollar bill said “Silver
certificate”? Today our bills say, “Federal Reserve Note”;
called fiat currency. Fiat currency is government IOU’s (political promises).
The value of fiat money is based on supply, demand and faith in the issuing
government.

Adam Smith said, “All
money is a matter of belief.” When the world loses faith, the currency
becomes worthless paper.

I’m concerned about Fed
Chairman Jerome Powell’s recent announcement about
targeting inflation:

“Our longer-run goal continues to be an inflation rate of 2
percent. …. However, if inflation runs below 2 percent following economic
downturns but never moves above 2 percent even when the economy is strong,
then, over time, inflation will average less than 2 percent. …. To prevent this
outcome…our new statement indicates that we will seek to achieve inflation that
averages 2 percent over time. Therefore, following periods when inflation has
been running below 2 percent, appropriate monetary policy will likely aim to
achieve inflation moderately above 2 percent for some time.

…. We are not tying
ourselves to a particular mathematical formula that defines the average. Thus,
our approach could be viewed as a flexible form of average inflation
targeting.”

What
could possibly go wrong?

The goal is to
“average” 2% inflation, using a “flexible” formula hidden
from the public. The internet is full of warnings about the possible
consequences.

Credit Bubble
Bulletin quotes Christopher
Joye in the Australian Financial Review:

“…. The world’s most powerful central bank – the US Federal
Reserve – ushered in a revolutionary change to its monetary policy framework…which
will allow the Fed to keep borrowing rates lower for longer, and tolerate
periods of what would have been unacceptably high inflation, could have
profound consequences for the price of pretty much everything.”
(Emphasis mine)

I contacted friend Chuck
Butler. He can decode “fedspeak” better than anyone I know.

DENNIS: Chuck,
once again, thank you for your time in helping us understand what is going on.

What is inflation? I was
taught that the more dollars a government creates, the lower buying power of
each dollar; which is reflected in higher prices for goods. As the world loses
faith in the currency, they move their money into other currencies.

The Fed dropped interest
rates to near zero, created trillions out of thin air, yet Powell says
inflation is too low.

Why isn’t inflation through
the roof already?

CHUCK: Dennis,
thank you once again for allowing me to opine!

In my college economics, I
had to study Adam Smith, and I agree with him wholeheartedly. Since the Fed has
decided to constantly debase the dollar, I no longer call the dollar money;
it’s nothing but currency…. Ok, let’s go!

1. Why isn’t it through the roof? It all depends on who you ask.

ShadowStats has it
above 7% using the government formula before they started playing with it:

The Chapwood Index is
even higher.

The government calculator
in on the fritz. The US Inflation Calculator tells
us inflation has averaged 1.69% since 2008 and they feel a need to spur
inflation!

I consider inflation to be
a personal thing. What I may spend oodles of currency on, you may not. If my
item is going through the roof with inflated prices, then I have that inflation
and you don’t! But that only goes so far, we are all affected buy food, gas and
medical costs.

During the Clinton
Administration, the President ordered Fed chairman Al Greenspan to find a way
to bring down inflation so interest rates could be lowered; thus making housing
affordable to the masses. Greenspan hired the Boston Commission, who came up
with the idea of “substituting”. Historically inflation was
calculated by using a fixed number of goods, putting them in a basket and
checking the prices on those goods each month. Under the new calculations, if
one item in the basket got too expensive, the Gov’t could just
“substitute” something else, similar to that item.

And now you know why the
Gov’t’s inflation calculator is on the fritz!

2. The phrase,
“Helicopter Money”, associated with former Fed Chairman Big Ben
Bernanke, is not a joke. The problem is all the Fed’s shenanigans, zero
interest rates, bond buying, and now even ETF buying, has destroyed the
“price discovery” of the markets.

This last round of currency
printing went to the casino banks and the zombie Corporations; not to the mom
and pops on main street. When the currency goes directly to the mom and pops,
then we’ll see inflation rise, and not before…. I hear the sound of helicopters
coming our way….

DENNIS: Robert
Wenzel, editor of the Economic Policy Journal warns:

“There is no way the Fed pulls this off without blowing price
inflation through the roof. …. They have no idea, apparently, that price
inflation can get way out of control, above 5%, very rapidly and it would then
require short-term rates of near 7% rather than zero, to choke off the price
inflation.

But the Fed is not going to
raise short-term rates to 7% anytime soon and so the price inflation could
eventually advance well above 5%.”

With the Fed’s
“flexible formula” could we see a huge jump in prices while the Fed
tells us everything is under control?

CHUCK: Yes…Mr.
Wenzel is bang on when he says, “that price inflation can get way out of
control, very rapidly.” How many people remember the late 70’s, and just
how quickly inflation rose to 12-13%? It didn’t take long, and once inflation
was high, it took yeoman’s effort to bring it back under control… (Thank you
Paul Volcker!)

I don’t like talking gloom
and doom, but Central Bankers banging the gavel for higher inflation just gets
me going. I can’t stop talking about all the problems that just this initiative
could cause.

Gov’t debt in this country
is already larger than the size of the economy! We have that weighing down the
economy; we don’t need inflation on top of that!

But that’s what the Fed
wants, so much so that if inflation never rises to the Fed’s target, whatever
it may be, then Powell’s tombstone will say, “No Inflation did this to
me.”

DENNIS: Low
interest rates, coupled with the Fed hell-bent on raising inflation doesn’t
bode well for the middle class. Working people hope their wages will rise with
inflation, but what about those looking to retire?

Yahoo Finance tells us:

“If the Fed was trying to “make up” for all
inflation misses since November 2008, the Fed would need 42 years of 2.1%
year-over-year core PCE inflation to average out to 2%….”

Chuck, what would you tell
those in their 50’s to project for their 401k returns when they are ready to
retire?

CHUCK: Man,
Dennis, you’re not throwing me any softballs here today!

OK…One has to think that
this stock market phenomenon can carry on for 20 more years, right? And when
the “correction” comes, it will hurt a lot of 401k’s values….

I always tell people:

1. Lower your debt, and if possible, get it out of your life!

2. Make certain that your
investment portfolio is diversified, and I mean really diversified, using
currencies and metals as different asset classes to reduce the overall risk of
the portfolio.

You certainly don’t want to
be heading to retirement, and have a blow up on Wall Street, right? The only
way to protect yourself is to have a diversified investment portfolio. Now, you
won’t be able to do your diversification all in one spot…. The Wealth Advisors
aren’t going to offer currencies and metals….

If Powell and his henchmen
get what they are looking for, rising inflation, you’ll be glad you have some
commodities like Gold & Silver can provide, in your portfolio! All this
currency printing will, eventually weigh heavily on the dollar’s value, and
it’s then that you’ll be glad that you have a mix of different currencies in
your portfolio.

I recommend making very
conservative projections and adjust your lifestyle accordingly.

DENNIS: One
final question. Many will figure things out and stay ahead of the game. Some
may have to downsize a bit, work a bit longer than they anticipated, but will
eventually retire and enjoy life. They will know what is going on and prepare
for the future without rose-colored glasses.

Do you see it the same way?

CHUCK: Yes,
I do. I warn people all the time to look under the hood, and around the corner,
at what the Gov’t and Fed and Treasury are telling us. As kids we had a phrase
for when people that were known to stretch the truth, would speak; we would
yell, “Pack of Lies, Pack of Lies”….

Word of mouth is the
fastest way to get an idea going around the country. People that have
diversified investment portfolios need to yell from the rooftops so other
people will hear and act. That’s my hope, Dennis.

The destruction of our
economy, dollar, and way of life is coming to a theater near you!

Dennis, thanks again for
inviting me.

DENNIS: My
pleasure, Chuck.

Dennis here. Money is a
matter of belief in the government. I believe “The American Spirit”
will rise to the challenge.

When the British Pound lost
their world reserve currency status, they took a step backward, survived and
many thrived. We want our readers to be in the latter group.

 

All Money is a Matter of Belief
Dennis Miller