October 13, 2010

The Market Has Certainly Lost Any Hope Of Price Stability In Dollar Terms

The market has certainly lost any hope of price stability in dollar terms. Since the Fed statement was released, gold prices have hit new all-time nominal highs, silver is the highest since the Hunt brothers tried to corner the market in 1980, and the Aussie dollar (a commodity currency) is nearing its own record highs. Even housing is headed back up. Meanwhile, the dollar index has hit a new 7-month low. In short, holders of US dollars are trading for any real assets they can acquire.

A confounding factor is the strong performance of US dollar-denominated bonds. When the Fed creates inflation, that erodes the value of fixed-asset investments like bonds, which can’t adjust their returns to the new price level. So many commentators are pointing to the record low bond yields as evidence that inflation is not a threat. But this is a misreading of the situation.

What is overlooked is that when the Fed prints more dollars, it typically uses them to buy bonds. Traders know this, so they are stocking up on bonds at ridiculous prices just to flip them to the Fed. They don’t care that, in the long run, the Fed’s policies will destroy the bonds’ value because in the short run, the weak dollar policy serves as a tremendous subsidy to bond sellers.

All the salient indicators tell me that the global dollar crisis has entered a new phase. The Fed is getting more aggressive about money printing because it really doesn’t have any other politically viable options. I’ve always said the Fed uses inflation to give appearance of prosperity, but I never expected them to come out and say it! You don’t give warning when you’re about to rob somebody, because then the victim might take precautions — in this case, buying gold and foreign equities.

We should be angry at what the Fed has pledged to do to us, and frankly I’m surprised there hasn’t been more of an uproar. But more important is to figure out how you are going to protect yourself.

in dailymarkets.com

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Peter Schiff`s comments on the economy, stock markets, politics and gold. Schiff is the renowned writer of the bestseller Crash Proof: How to Profit from the Coming Economic Collapse.