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.
Three Glencore Xstrata Takeover Targets: TCK, AAL, FCX
The proposed mega-merger of Glencore International PLC and Xstrata PLC will create a global powerhouse with the potential to shake up the mining industry overnight.
If completed, the $90 billion deal will form a mining behemoth with control over one-third of the global market for thermal coal, and make it the world's largest producer of integrated zinc production. It will also rank as the world's third-largest copper producer and fourth-largest nickel producer.
Basically, the merger would create a super-giant that could compete with the industry's heavyweights - BHP Billiton Ltd. (NYSE ADR: BBL), Rio Tinto PLC (NYSE ADR: RIO), and Vale (NYSE ADR: VALE) - the mining industry's "Big Three."
The merger is certain to spark volatility in the sector, according to Money Morning Global Resources Specialist Peter Krauth, an expert in metals and mining stocks who runs the Global Resource Forecast investment service.
"What observers need to understand is consolidation like this concentrates decision making," Krauth said. "The fewer participants in an industry, the more impact they have.
When output is either increased or decreased by one or more mega producers, it will also have a larger impact on world supplies, and therefore prices."
With that kind of power, the Glencore-Xstrata deal will form a goliath with the appetite - and the muscle - to swallow its weaker rivals.
Glencore Xstrata: Hungry for MergersBased on estimated 2011 results compiled by Credit Suisse Group AG (NYSE ADR: CS), the new company would have revenue of $211.3 billion and net profit of $7.5 billion. That kind of clout would make its stock valuable currency for more acquisitions.
Plus, both companies are led by aggressive chief executives that have a history of snapping up competitors.
Xstrata has been racking up spectacular growth through acquisitions, although lately it has focused on organic or internal growth to boost production by 50% by 2014.
Glencore, a trader of metals, minerals and oil, has said the main idea behind going public after almost four decades as a private company was to grab acquisitions.
Of course, the new company would have more going for it than sheer size and a forceful management team.
Glencore has a giant global intelligence network of 2,000 employees in about 40 countries. Many of them are traders and marketers that collect extensive data on what commodity buyers want and when.
"Glencore's network makes the CIA look like your grandmother's coffee club," columnist Eric Reguly recently wrote in The Globe & Mail. "It has been adept at forecasting commodity prices based on intimate knowledge of production, demand, regulations, political whims, transport costs and movements everywhere."
Glencore's intelligence network will likely direct it to takeover targets that have iron ore resources, an area where Xstrata currently lacks exposure.
The industry's Big Three control nearly 70% of the one billion-ton annual iron ore seaborne trade, along with contract pricing. Lately they've been dampening prices by flooding the market with iron ore, driving high-cost producers out of the business.
But their mushrooming market shares have triggered more regulatory reviews by concerned governments. That should clear the way for the new Glencore Xstrata entity to target smaller competitors without the Big Three interfering.
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Ben Bernanke is Every Gold Bug's Best Friend
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday ... a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
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Not Much of a Debate: Inflation is Part of the Plan
Forget about lost decades. Forecasts that we'll be turning Japanese couldn't be further from the truth.
It's simple, really. Deflation is not in the interest of anybody in power, so it's very unlikely to happen.
The U.S. Federal Reserve's policy move to target inflation last week just re-emphasizes this point.
That's not to say deflation is a bad thing for everybody.
For savers and those living on fixed incomes, deflation would be a very good thing indeed.
Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation.
However, the very people who would gain from deflation are not in power.
The People's Bank of China can't vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful savers' political movement. After all, this is not Germany or Japan!
Meanwhile, in the real world, the U.S. government is spending far more than it takes in, and its debt is rising to dangerous levels. This has been happening on a bipartisan basis since at least 2001.
The Tea Party may have elected a Congress committed to reducing spending, but none of the battles of 2011 actually reduced spending - they just slowed the rate of growth somewhat.
Since much of the debt is borrowed long-term at low interest rates, the best way to reduce its burden on future generations is to encourage inflation.
Savers may lose out on the deal, but to those in Washington, the idea of inflating our way out of debt is irresistible.
Of course, sometimes we can depend on an independent central bank to resist this temptation. But at present, Fed Chairman Ben Bernanke is committed to near-zero interest rates in his fight against deflation.
Now you don't have to be a conspiracy theorist to realize that, if the power structure is committed to at least moderate inflation, inflation is what you are going to get.
In fact, it is already brewing.
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Surging Corn Prices Making Hay for Commodities Producers
Corn prices have surged more than 70% since May and could rise even higher in coming weeks. Prices will remain elevated for at least the next year, perhaps even testing their 2008 record high of $7.65 a bushel. That will likely mean higher food prices across the board for at least the next year.
Money Morning predicted in May that after falling below $3.50 per bushel in March, corn prices would surge higher than $6 by the end of the year. That forecast has proven prescient, as corn rose to a two-year high earlier this month.
Increased demand from emerging markets and a smaller-than-anticipated U.S. harvest are the driving forces behind corn's resurgence.
Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading
An episode of the television news program "60 Minutes" that aired Oct. 10 highlighted investors' fears over the growing trend of high frequency trading (HFT) run by a world of "supercomputers."
The "60 Minutes" piece prompted this letter from a reader wondering if the technological shift means it's time to readjust investment strategy.
Sunday night on "60 Minutes" they had a story about high-speed computers that are out-trading humans. Is it time to refocus on the world stage and find tangible rather than paper investments to put your money in? A partnership in a retail or manufacturing venue surely is more transparent than the stock market.
--RomanMoney Morning has been examining the effects of high frequency trading for years. In August 2009 Contributing Editor Martin Hutchinson said high frequency trading systems were front-running the market.
Surging Coffee Prices Trigger Consumer Pain, Investor Gain
Starbucks Corp. (Nasdaq: SBUX) has announced that it will charge more for many of its drinks to compensate for surging coffee prices, which have climbed to their highest level in 13.
The famous coffee chain announced Wednesday it would make "targeted price adjustments on certain beverages in certain markets," according to a press release on its Web site.
Starbucks said it tried to hold off on the change, but the continuing climb of green Arabica coffee bean prices - along with the costs of sugar and cocoa - forced the company to offset rising expenses.
Investing in Cotton: The New "King" of the Commodities Sector
Gold is grabbing the headlines setting daily record highs. Silver is setting an-even-more-torrid pace. Wheat and coffee - American breakfast table staples - are surging due to bad weather around the world.
But there's another commodity that's up big: It's surged as much as 55% in the last 12 months to reach its highest price level in 15 years. And there's plenty more to come: Global demand far outstrips supply, creating an imbalance that won't be solved anytime soon.
I'm talking about cotton, the "new" king of the commodities sector.
"We have an extremely bullish situation," Mississippi State University Prof. Emeritus O.A. Cleveland said during a recent Ag Market Network conference call. Cleveland, a noted agricultural market economist, said prices could climb another 30% or more due to the ongoing supply/demand imbalances in play worldwide.
For three ways to profit from the continued rally in cotton, please read on...
Keeping Tabs on Thailand: An Asian Tiger Lurking Low in the Reeds
Last week we talked about Singapore and Thailand - two Asian economies that are quietly taking off. Today I want to add to those thoughts with a few more key points that opportunistic U.S. investors should know about Thailand, in particular.
Over the weekend, the Thai currency, the baht, rose to its highest level since 1997 due to an improved outlook for economic growth and expectations of more investor inflows. A current-account surplus of $5.42 billion this year through July and the fact that the Bank of Thailand has raised its benchmark interest rate twice this year have also helped the baht post the second-best performance among Asia's most-traded currencies excluding the yen.
"There has been quite a lot of demand to buy the baht from offshore, probably from foreigners to buy Thai stocks and bonds," Kozo Hasegawa, a Bangkok-based foreign-exchange trader at Sumitomo Mitsui Banking Corp., told Bloomberg News. "Money is flowing into Asia on the region's strong economic outlook."
The rise in the currency has coincided with a 30% advance in Thailand's SET Index since May, when government troops smashed anti-government protests.
China Trade Surplus Reignites Tensions Over the Yuan
China in August posted its third straight trade surplus of more than $20 billion, putting friction with the United States over the nation's currency back in the spotlight.
Exports rose 34.4% in August and imports climbed a greater-than-expected 35.2%, leaving the country with a $20.03 billion surplus, a customs bureau report showed Friday.
But a sustained trade gap with the United States could embolden American lawmakers who are pushing to penalize China for what they consider unfair trade practices.