Friday, September 09, 2016

Jim Rickards*:
The Federal Reserve’s Only Escape 
Is To Trash the Dollar
Rickards sees Federal Reserve Chair Janet Yellen as the modern day Harry Houdini in terms of becoming the greatest escape artist of the 21st century .. "Yellen is handcuffed by weak growth, persistent deflationary trends, political gridlock, and eight years of market manipulation from which there appears to be no escape. Yet, there is one way for Yellen and the Fed to break free of their economic handcuffs, at least in the short run. Yellen’s only escape is to trash the dollar. Investors who see this coming stand to make spectacular gains." .. financial repression of forced inflation is the preferred solution: "Inflation would help to solve the U.S. debt problem because it would lower the real cost of the debt. Making the debt burden sustainable is not about real growth; it’s about nominal growth. Nominal growth is what you get when you add inflation to real growth. For example, if real growth is 2% and inflation is 2%, then nominal growth is 4%. Since debt is repaid with nominal, not real, dollars, then 4% nominal growth is enough to make debt sustainable even if deficits are 3% per year." .. will we get inflation through helicopter money? - "We may see helicopter money in 2017 if there’s political will in Congress and the White House. But helicopter money does not guarantee inflation. People and companies on the receiving end of government deficit spending may just save the money or pay down debt instead of spending more themselves." .. any other ways to get inflation? - "The IMF could issue world money in the form of special drawing rights, SDRs. This may happen in the next global financial crisis, but it won’t happen in the short run. The IMF moves even more slowly than the Fed. SDRs may be issued in sufficient size to cause inflation in 2018. But it’s unlikely to happen before then." .. any other ways to get inflation? - "The third way to get inflation is for governments to dictate a higher price for gold, perhaps $3,000 per ounce or higher. The idea is not to reward gold investors. The idea is to devalue the dollar relative to gold so the dollar price of everything else goes up. The U.S. government did this with some success in 1933 when it raised the price of gold by 70% in the middle of the Great Depression. However, this method is so extreme from a central banker’s perspective that I don’t expect it in the most desperate circumstances. We may see this in 2019, but it’s unlikely to happen sooner. That doesn’t mean gold won’t go up on its own – it will. It’s just that investors should not expect the government to force the price higher by official action anytime soon." .. any way to get inflation this year? - "Currency wars. The Fed can trash the dollar and import inflation in the form of higher import prices."
LINK HERE to the essay

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