As recently as September, the Federal Reserve viewed inflation as a, “significant concern.” But a collapse with commodity prices coupled with a sharp decline in consumer spending has virtually eliminated any fear the Fed may have harbored toward rising prices. The battle the Fed is now fighting is that of a weak economy and deflation. Inflation risks are now off the table!
In Zimbabwe, Africa inflation remains a dragon to slay. According Steve H. Hanke, Professor of Applied Economics The John Hopkins University and Senior Fellow The Cato Institute, Zimbabwe is the first country in the 21st century to hyperinflate. Mr. Hanke writes, “In February 2007, Zimbabwe's inflation rate topped 50% per month, the minimum rate required to qualify as a hyperinflation (50% per month is equal to a 12,875% per year). Since then, inflation has soared.
On the Cato Institute website dated November 14, 2008 it says, “Absent current official money supply and inflation data, it is difficult to quantify the depth and breadth of the still-growing crisis in Zimbabwe. To overcome this problem, Cato Senior Fellow Steve Hanke has developed the Hanke Hyperinflation Index for Zimbabwe (HHIZ). This new metric is derived from market-based price data and is presented in the accompanying table for the January 2007 to present period. As of 14 November 2008, Zimbabwe's annual inflation rate was 89.7 Sextillion (1021) percent.
Here is what the figure 89.7 Sextillion looks like and keep in mind that it is a percentage rise in inflation; 89,700,000,000,000,000,000,000% . Inflation indeed!
A simple and popular definition of inflation is; “too much money spent chasing too few goods.” Based on that definition it is understandable that gold prices rallied $90 an ounce the past four sessions. Prices soared because the US dollar plunged 2.7% on the first day of this week, the most severe decline for the greenback since September, 1985. The dollar is beginning to leak!
The Market Oracle on November 2, stated, “In the past few weeks, U.S. Federal Reserve has joined with U.S. Treasury in an attempt to remedy the financial fiasco. In that effort, the Federal Reserve's balance sheet has ballooned by more than 50%. Never in peace time history has the central bank for the world's reserve currency so intentionally implement policies that will destroy the value of that reserve currency.”
The Market Oracle stated further, “As a consequence of that massive monetary ease, the U.S. money supply, M-2, is now growing at a double digit rate. The deflationists can now quite worrying, the quantity of U.S. dollars is rising and the value of those dollars will therefore fall.” And in the final line of their analysis, they write, “This most recent explosion of U.S. monetary growth is signaling that the return on Gold should begin rising dramatically. That would be as expected as the Federal Reserve is doing all possible to inflate, and reduce the value of the dollar. At the same time a massive short, real and psychological, position has been built such that a classic short squeeze in gold is extremely likely.”
Boosting gold prices this week and weakening the dollar lower was the most recent move by the Federal Reserve to thaw the flow of credit. The Fed committed another $800 billion to purchase debt and asset backed securities. The chief manager of Japan's largest publicly traded lender, Akio Shimizu said, “We may see the Fed's balance sheet deteriorate because it's taking on all these assets. This is a latent risk for the dollar that could weaken it over the long term.”
A rule of thumb in currency trade is; A nation with high interest rates enjoys a strong currency. A nation with low rates, suffers a weak currency. Money flows to nations with high rates of interest and avoids nations with low rates. And that only makes economic sense.
This week, the yield on 10 year US Treasury debt fell to 2.98 per cent for the first time in 50 years. The decline in yields was, as FT.com said, “in response to unconventional policy measures taken by the US Federal Reserve this week aimed at pushing short-term and long-term interest rates lower.” Some analysts feel the Fed will push rates lower in ‘09 with a target of 2.5 percent. Others think rates will hit zero!
The US dollar has enjoyed a 27% rise since July as investors flocked to the currency for safety's sake. The dollar was viewed as a safe haven in times of a crisis. The rally was based on fear, not on fundamentals.
What then, happens to the dollar once reason overcomes fear? According to “Robert Sinche, New York-based head of global currency strategy at Bank of America Corp., There are some early signs of stability and normalization starting to come back into the foreign-exchange markets. For us, it means some pretty significant setbacks for the dollar.”