Wednesday, July 13, 2011

Remember That Crumbling Edge ... -- UPDATE: Ben says, Or, like, whatever

... I have mentioned a couple of times?

Looks like Bernanke is preparing to shove us over. ZH does a lot of bomb throwing so I don't normally pay too much attention to them. However, the Fed is clearly talking QE3 despite the warning against it from that harshest of critics, our old friend Reality.

As I have said before, the way I look at it, the federal government has no choice other than to devalue the dollar and ramp up inflation. Well, actually, they do have a choice, though not one spineless politicians are willing to make -- politicians from either party.

The righteous alternative would be to demand an audit of the Federal Reserve, face the crisis directly, and drastically cut government spending. Yes, it would hurt. As a consequence, however, we would eventually have a genuine recovery based on agriculture, mining, manufacturing, energy production, and trade rather than yet another bogus bubble based on the proliferation of bureaucrats.

For those with debt and an ability to generate some income, the scenario is not completely bleak. They will be paying back their debt with increasingly worthless dollars. This, of course, includes government -- not just in Washington, but in the states like California. Inflation will absolutely devastate the savings of those who have played by the rules -- especially as long as the Fed holds the interest rates down while trying to inflate the markets. Back in the '80's, Volcker beat inflation by jacking interest rates and tightening the money supply. But no one was lying about inflation back then. The government was not attempting to claim "mild" or "controlled" inflation when fuel and food were spiraling (if not rocketing) higher. Bernanke, Geithner, et al, clearly intend to let inflation run in the hope of sparking something they can label as growth in the economy.

Apart from successful implementation of home-based cold fusion generators, a massive push for thorium nuclear reactors, a move to build cars and airplanes out of graphene, or some similar technological breakthrough that impacts energy costs and productive on a global scale, we are going to suffer if the Fed attempts to inject more liquidity into the system and further erode the dollar's buying power.

It's like a dam that has been erected. The water level behind it rises. Instead of opening the spillway and relieving the pressure -- i.e., allowing the bubble to burst and the economy to reset -- the powers-that-be keep the gates closed and sandbag on top of the dam. What this guarantees is that when the makeshift Keynesian sandbags topple, and they will, the downstream flood is going to be unimaginable. And the dam itself may be destroyed.

Of course, there remains the possibility that QE3 is merely an empty threat intended to move money temporarily into commodities, but that doesn't make sense as it seems like it would put upward pressure on bond rates. But what do I know?

The best investment still looks to me to be "means of production" and enhanced self-sufficiency. Commodity investments -- including metals -- might be a good hedge, but I can offer no advice one way or the other. I'd rather talk about handgun stopping power.

Update as of 7/14/11 -- Apparently Bernanke isn't as sold on QE to the Nth power as we thought. Maybe.


  1. I've been reading the Monty Pelerin's World blog off and on for a while. I've added it to the side bar. If you want to skip the AT connection, here is the direct link to the piece on MPW.