Wednesday, December 17, 2008

Welcome to Hyperinflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Yesterday ZIRP (zero interest rate policy) became a reality in the United States. The Fed cut its overnight funds rate to a range of zero to 0.25 percent. The New York Investing meetup predicted such a possibility in the fall of 2007, when I first said that if things became bad enough the Fed would lower interest rates to zero. In our December 4th meeting two weeks ago, we predicted that 2009 would be the year of ZIRP with the Fed lowering interest rates to around zero and keeping them there. Things apparently have become bad enough.

Yesterday, the Fed bluntly announced that it would print as much money as necessary to deal with the current economic contraction (read depression). And this has allowed the American press to finally acknowledge in its articles that the Fed has been printing money to cope with the credit crisis - something that I have been repeating like an obsessive-compulsive parrot for more than a year. Since this September alone the Fed's balance sheet has more than doubled (that's in only 3 months... think about that) from around $900 billion to more than $2 trillion. With its new programs to buy up worthless mortgage-backed securities that number will be up to $3 trillion. You may safely assume it will go much higher after that.

The authorities and their allies in the mass media assure us that we needn't worry about the obvious (hyper)inflationary implications of the Fed's moves. It is claimed that deflation is the big problem facing us (and War is Peace and Hate is Love, etc. see Orwell's novel 1984 for similar government assertions). The facts, as well as simple common sense, indicate otherwise. The government's own highly manipulated numbers which grossly understate inflation, still indicate prices are going up. The big drop in price increases can be traced to falling oil prices and literally nothing else. Since commodities can only fall to their cost of production, oil is not likely to fall much further and the 'deflation' threat could disappear overnight. The market will then have to deal with a mountain of government printed money instead.

Apparently we needn't worry about that either. While the economic establishment admits that the Fed's actions are potentially dangerous, former Fed Vice Chair Alan Blinder himself said yesterday "If that much money is left in the monetary base, it would be extremely inflationary", it claims the money can be withdrawn as the economy recovers and then everything will be fine. The German authorities said the same thing about their money printing in the early 1920s. But every time they tried to stop it, there was an immediate negative reaction in the economy, so they restarted it again immediately. The U.S. Fed in the 2000s will be no different. Money printing is a form of addiction and addicts will do anything to maintain their high until they hit bottom.

NEXT: The Truth About Deflation - A Crude Analysis

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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