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Inflation

Why the U.S. Dollar is Rising – And Why It's Still Doomed

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Many have wondered - and rightly so - why the U.S. dollar is rising even though the U.S. Federal Reserve has done just about everything possible to debase the currency over the past five years.

Over the past two years, the U.S. Dollar index, which measures the dollar against a basket of major world currencies, is up by more than 12.6%.

Part of the answer is that most of the world's other central banks have pursued easy money policies similar to the Fed's. In the so-called "currency wars," the U.S. dollar has one major built-in advantage.

"The U.S. has never defaulted," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "The world may hate our guts, but when all hell breaks loose, they all love our dollar."

Also helping to explain why the U.S. dollar is rising is that it remains the world's reserve currency - the money a majority of nations use to buy commodities such as oil -- and that the U.S. economy, for all its warts, is in better shape than most of the other developed economies in the world.

"The dollar the best-looking horse in the glue factory," Fitz-Gerald said.

So it wasn't too surprising that when the Fed recently hinted that it might start "tapering" its quantitative easing (bond-buying) policies later this year, the U.S. Dollar index spiked 3.1%.

But Fitz-Gerald said that investors still need to be wary of the stronger U.S. dollar going forward.

This Sept. 2 Event Could Send the U.S. Dollar Crashing

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The Misunderstood Link Between Oil, Natural Gas and Inflation

Energy prices, particularly oil and natural gas, are no longer a direct driver of inflation. Oil and gas prices have been resilient in the absence of inflation.

The deeper reason for the upward move in prices has been the Fed's easy money and low interest rate policies.

Oil and gas are giving investors greater leverage to make profits in upcoming market gyrations. Dr. Kent Moors explains.<

8 Reasons Your Dollar Doesn't Go As Far As it Did 10 Years Ago

Currency USD black eye Patients' hospital expenses have nearly doubled in the past decade. So, too, has the price of college textbooks. And gas prices have more than doubled, while prices of fuel oil and other fuels for home use have climbed a whopping 145%.

It's been a tough decade on the wallet, thanks to inflation.

The figures are based on a Yahoo! Finance analysis of items and services tracked by the Bureau of Labor Statistics' Consumer Price Index.

And the CPI, of course, is based on government stats which, as Money Morning has reported, routinely understate inflation.

Here are 8 reasons why inflation is pinching you, no matter what the Fed says about low inflation:

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With Unchecked U.S. Spending, It's Time to Hedge Against Inflation

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Uncontrolled government spending could force the Fed to monetize the government's debt, creating runaway inflation, former Federal Reserve Governor Frederic Mishkin warned in a report.

If these circumstances were to occur, the Fed would be unable to do much, if anything, to control inflation, Mishkin said in the report, presented at a conference at the University of Chicago Booth School of Business.

In that case, Mishkin and his co-authors, David Greenlaw, James Hamilton and Peter Hooper, argue that the result could be "a flight from the dollar," according to a summary of the report by noted Fed-watcher Steven K. Beckner writing for MNI.

The report states, "Countries with high debt loads are vulnerable to an adverse feedback loop in which doubts by lenders lead to higher sovereign interest rates, which in turn make the debt problems more severe ... Countries with debt above 80% of GDP and persistent current-account deficits are vulnerable to a rapid fiscal deterioration as a result of these tipping-point dynamics."

The authors of the report estimate U.S. net debt, excluding debt held by the Social Security Trust Fund, at about 80% of GDP in 2011, double what it was a few years before. To make matters worse, the United States runs a persistent current account deficit, which is funded by borrowing from other countries.

This puts the U.S. in a worse spot than Japan which, although its debt is much higher as a percentage of GDP, has a large current account surplus and a high savings rate.

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Why Veteran Trader Says Inflation in 2013 Is Imminent

Currency USD inflated no shadow

Is a spike in the monetary base - currency in circulation plus bank reserves at the Fed - the first sign of imminent inflation?

Art Cashin, the well-respected director of floor operations at the New York Stock Exchange for UBS, recently told King World News the increase in the monetary base may well be a sign of impending inflation.

Monetary base, sometimes called high-powered money, is the basis for the bank lending that drives our economy. When interest rates are normal, banks use their reserves for lending.

Unfortunately, these are not normal times. The U.S. Federal Reserve and other central banks around the world continue to hold interest rates at zero.

Zero interest rates mean zero returns. Investors don't get paid for investing. Banks don't get paid enough interest to compensate for the risk of lending money into the economy. Looking at it another way, there is no penalty for doing nothing with your money.

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Why There's No Real Inflation (Yet)

According to Nobel Prize-winning economist Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
Well, apparently not...
There's certainly plenty of cause for inflation today. Every central bank in the Western world is holding interest rates down, and almost all of them are printing money like it's going out of style. And the big deficits governments were running should be making inflationary matters even worse. Taken together, monetary and fiscal policies are far more extreme than they have ever been.
But today inflation is only running at around 2% - well below where it should be, according to Milton's monetarist theories.
What does it all mean?

Why the Spending Cuts Battle Looks Uglier Than Fiscal Cliff Fight

President Barack Obama needs swift approval from the Republican-run Congress to raise the swollen $16.4 trillion debt ceiling next month in order to prevent the U.S. government from a default. But here's where the real battle will go down.

Why Inflation is the Economy's "Iceberg" in 2013

Even though Ben Bernanke's Fed has kept interest rates close to zero, inflation hasn't been a big problem since the 2008 financial crisis.

Despite what many observers have expected inflation has remained quite tame.

However in 2013, that may be about to change. One factor that might cause a surge in inflation is the fiscal cliff.

That's because Bernanke is already buying $1 trillion of Treasury and housing agency bonds each year ($85 billion per month) against a budget deficit that is about the same level.

That means the inflow of funds to the economy from the Fed and the outflow of money to fund the government's spending are about balanced.

However, if we go over the fiscal cliff the Federal deficit immediately falls to about $300 billion per annum. At that point, Bernanke would be injecting an extra $700 billion a year into the economy - which would have a corresponding inflationary effect.

The Case for Higher Inflation

But that's only part of the inflationary story.

Central banks around the world are also expanding their money supply. China has become more expansive, the European Central Bank is buying bonds of the continent's dodgier governments and Britain like the United States is monetizing nearly all the debt it creates to fund its budget deficit.

The big change in 2013 is now in Japan, where the new Abe government has told the Bank of Japan it wants much more buying of government bonds, to push the inflation rate up to 2%.

And just as Bernanke's money creation increases inflation internationally, Japan's new monetary push creation will likely increase inflation here in the United States.

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QE4 is Coming; Will Inflation Follow?

Many observers expect the U.S. Federal Reserve to announce another round of quantitative easing, or QE4, this afternoon following the Federal Open Market Committee (FOMC) meeting.

The consensus is that the Fed will purchase an additional $45 billion of bonds from the secondary market each month.

That means the Fed would replace the monthly $45 billion used to swap short-term Treasuries for long-term Treasuries under Operation Twist, which expires at the end of this month, with outright bond purchases.

In addition to the $45 billion a month used in Operation Twist, the Federal Reserve Bank has been purchasing $40 billion of mortgage-debt securities monthly in its continued effort to boost growth.

In total, the market expects the Fed to continue to purchase $85 billion worth of bonds on the secondary market each month for the foreseeable future.

Now some investors fear the Fed with QE4 will seal the deal on skyrocketing inflation - but it takes more than increased money supply to raise prices.

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Inflation-Proof Investments: Go Beyond Gold and Oil with These Two Sectors

By now, most investors know that the U.S. Federal Reserve and other global central banks continue to engage in dangerous, currency-debasing forms of monetary stimulus - meaning it's time to stock your portfolio with inflation-proof investments.

Known as quantitative easing on this side of the pond, there are dire consequences to just one tryst with QE.

But here in the U.S., we're on our third go-round with the QE addiction.

This means we're headed down a dangerous path.

That's because too much money supply triggers inflation. While it's not definite that QE3 will bring about a return to the old Weimar Republic or the problems Zimbabwe has had to deal with recently, there is almost no getting around the fact that a financial system awash in liquidity is a financial system vulnerable to inflation.

Over the course of history, gold has been the favored destination for investors looking to combat inflation, but there is more to the story these days. The good news is inflation can be fought myriad ways and that includes going beyond the usual suspects.

Here are a few other overlooked inflation-proof investments that'll let you profit while prices soar.

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The QE3 Dangers Bernanke Isn’t Telling You About

Hoping the third time is the charm, the U.S. Federal Reserve voted on Sept. 13 to launch another bond-buying program, QE3.

Equity and commodity markets cheered the Fed's move. Stocks rallied and analysts raised precious metals price forecasts.

QE3 differs from the first two rounds in that it is an aggressive open-ended purchase program of $40 billion per month of mortgage-backed securities. The buying is slated to continue until we reach substantial and sustained improvement in the U.S. economy, which won't be a short-term achievement.

The program aims to lower long-term interest rates, stoke consumer demand and bring down the elevated unemployment rate.

But some opponents think the latest stimulus measure from Fed Chairman Ben Bernanke will fail to achieve any of that.

In fact, the QE3 doubters have a lot to say - and anyone with money in the markets right now should pay attention to what could happen.

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How QE3 – Like QE1 and QE2 – Will Trigger Inflation

The traditional safe haven assets of gold (NYSE: GLD) and silver (NYSE: SLV) have surged in price due to the announcement of the latest round of quantitative easing, QE3 - but those aren't the only assets QE3 will push higher.

While QE3 might seem harmless to U.S. consumers, it is present every time they gas up their cars or buy food at the grocery store.

In fact, all three rounds of quantitative easing have led to higher priced commodities.

Whether you realize it or not, QE3 - same as the stimulus programs before it - is adding greatly to the costs of everyday life. QE3 is directly leading to higher prices for oil, food and the cost of imported goods.

Over time, that results in a tremendous consumer expense in all product and service categories.

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Rising U.S. Food Prices are About to Eat Away at Your Savings

As U.S. households prepare for Recession 2013 , they'll have trouble saving as one constant expense is starting to take a sharp climb: food prices.

Higher U.S. food prices are the last thing the country needs as 2013 is set to bring with it a painful bunch of tax increases and the ominous fiscal cliff, but U.S. consumers need to understand that their grocery bills are about take a much bigger chunk out of their wallets.

You see, the United States is in its worst drought since the Dust Bowl. Farmers for months have been grappling with the effects, which are trickling down to your local store shelves.

"In 2013 as a result of this drought we are looking at above-normal food price inflation," U.S. Department of Agriculture (USDA) economist Richard Volpe told the Associated Press. "Consumers are certainly going to feel it."

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The U.S. Lies About Inflation: Here's The Inflation Secret The Government Doesn't Want You to Know

Is anyone else having deja vu?

In 1973, the U.S. economy had:

  • Record oil prices (check).
  • A stock market crash (check).
  • And jaw-dropping inflation (check).
Sound familiar? Yep, brush off your bellbottoms. The 70s are back.

And soon even Bernanke's shell games won't be able to hide the truth. After years of the Fed's loose money policy, inflation is biting back. And it's going to get ugly.

The government could stop inflation in its tracks if it would make some hard decisions. But if it doesn't, there are still proven ways to protect yourself from inflation. (For specific anti-inflation recommendations, take a look at the latest Money Morning special presentation right here.)



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Five Savvy Ways to Conquer the Wall of Worry


If you like extreme risk and consider living on the edge to be "normal," today's column isn't for you.

Today I'm writing to the millions of investors who are completely terrified by the prospect of what's next and who simply want their faith restored - not to mention their investments.

To all of them I would say: You are not alone and you're not wrong to be apprehensive.

Our political situation is an embarrassing train wreck, our national debt looks like a one way trip to financial hell, housing remains in the dungeon, unemployment is unacceptably high and Europe...oh Europe.

It's nothing short of a gigantic wall of worry.

Plus, there have been so many attempts to "fix" things that I've lost count. Throwing good money after bad is a fool's game and one that will have very real and inevitable consequences.

So what should investors do?

The Fed's War on Capitalism

Here's how I see things. The "Whitewash Ministry" has basically five options:

  1. Repression
  2. Devaluation
  3. Austerity
  4. Deflation
  5. Inflation
You can forget the double "d's" - devaluation and deflation.

Even though both would be the proper way for free markets to bleed out the excesses of the past, they are essentially political nukes and nobody has the willpower to touch either one of them.

The third, austerity, is being tried but only halfheartedly. Our leaders have no idea what this actually means. Since they remain completely unaccountable, there is no true incentive.

Besides, large numbers of people have figured out it's easier to be on the dole than it is to actually work, so this is another disincentive for meaningful cuts in spending.

As for inflation, this too is officially a non-starter as long as interest rates are held near zero. Unofficially, it's a different story. Most investors I know are feeling the heat of 12% to 15% a year in their wallets.

That leaves option number one - repression.

You can call it what you want, but repression is really a fancy way of saying that our government is conducting punitive monetary policy.

While they mouth off about how they want to create jobs and take care of the middle class, in reality they're eviscerating it.

How?

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