Ben Bernanke’s Four Options

July 21, 2009 | By | Reply More

US Fed Chairman, Ben Bernanke, tells us that slack in the economy will tend to suppress inflation and that he has four options for removing excess liquidity.

In other words reversing the effect of the (so far) one trillion dollars of cash and new money pumped into the US economy. Hints that monetary policy will not be tightened “ for an extended period” do not suggest to us that the “green shoots” are expected to burst into flourishing growth any time soon.

And yet there are those outside the US, with no political axe to grind, who believe that the global economy may be stabilising. Although the US is still the most influential and powerful driver of the global economy it, or rather the US dollar, is visibly diminishing in authority the longer the recession lasts. Economic stability is to be warmly welcomed even if the level of stability is at crisis level. Let us all profoundly hope that soon we can see true signs of growth taking off from today’s base.

Yet we fear that there is worse to come from the US if, for no other reason, and there are plenty of others, than that the housing debacle is far from over.

That leaves the US somewhere between a rock and a hard place!

Either stop the cash injections, bail outs, quantative easing and halt the money printing presses and let nature take its course as weak and mismanaged banks, large and small businesses, et al., fail, or to continue to prop up the economy while the dollar lurches ever closer to oblivion.

It can be argued that for the US to continue along the first path will ultimately lead to the consequences of the second, of letting the weak go to the wall. That the inevitability of mass unemployment and hardship on the same scale as the great depression of the nineteen thirties will be revisited.

Which leads us to believe that our leaders are not so heartless as to wish that upon us poor masses and that they have a master plan to put into action!

Lets face it there is another presidential election in less than four years!

Thinking back to the seventies when we had runaway inflation, those of us who were lucky enough to be earning bought property, colour TVs, bigger and better new cars on credit and anything else that took our fancy knowing that within a year or two the cost would have gone up by a third or more. You could even order a new car and sell it on for a profit the day it was delivered to you! Saving money was for the fiscally ignorant.

That a similar situation is the end game of the Ben and Tim seems a safe bet. Let the dollar depreciate while keeping the nation afloat and the masses fed. Thus in effect lowering the real cost of the colossal debt being built up in the economy and in the hope that a revival in the global economy will occur in time to allow the US to retain, or maybe regain, its world fiscal, industrial, financial, and above all its consumer dominancy.

If, and what a big if, Ben and Tim get there timing right, does that mean all will be alright in the world?

I wish!

Other countries are also looking to devalue their currencies on the pretext it will help their economies, encourage trade, exports etc.

Today we note that Sweden has a minus, yes minus, bank interest rate of 0.25%. Lars Svenson, the initiator of this negative interest rate, and incidentally a colleague of Ben Bernanke at Princeton, justifies his initiative on the grounds that it will push down the Swedish Krona´s exchange rate.

Apparently Mr Svenson is highly influential in global banking policy making but can we really take him seriously when he goes on to tell us that his negative interest policy will allow Sweden to import more, consume more and invest more!

Do they live on another planet!

Our interest here is how do all these events and projections affect precious metals, namely gold, silver and PGMs. Our answer is simple. World wide deflation will only ´rule the roost´ for a limited period and it is a reasonable assumption that it will only slow down the gold and silver uptrend but will not reverse it

That hyper inflation will eventually take its grip is a given, it is built in to the economic plans of just about every developed economy and will become more and more encouraged by the Chinese in particular, with their strong currency and political aims.

Remember that the Chinese are building up their gold reserves.
Whether the US gets its timing right is not a great issue for gold buffs, if their resources are in the only age old proven safe havens of gold and silver they will come out on top. Platinum, palladium and other PGMs are also a reasonable bet, particularly as they have such important uses in the latest advancements in industry and technology. If there was a reasonable market in Iridium we would be filling our boots with this extraordinary, but very rare PGM, only about three metric tons are mined annually.

There are a lot of vested interests out there that do not want us mere mortals to put our faith in gold, silver and PGMs. Bankers and brokers are left somewhat out of the loop commission wise when money goes into precious metals.

Banks, mutual funds and other financial institutions are major advertising revenue providers to the Press and TV companies who are undergoing increasingly hard times, so do not expect their pundits to be impartial.  Last, but maybe not least, there are governments who have almost impossible problems in getting to grips with tax-savvy gold and silver bullion and coin investors.

The market will continue to fluctuate, depending on the price of oil and the perceived value of the dollar, do not be disheartened by any turn around in the gold price, just watch for the simplest chart signals and take opportunities to buy.

Always observe the gold /silver ratio as silver can be more volatile than gold, and offer silver trading opportunities when the ratio goes outside the 68 to 70 plus parameters in a gold bull market.

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