"Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident."
This is a sentence in the press release which accompanied the FOMC's decision to raise the Fed Funds rate by yet another 0.25% on March 22. It is the only part of the press release which differs in wording to those which have gone before it. It is also, supposedly, the sentence which has given substance to the anticipation which has been building up for the best part of two weeks now that higher official US rates will act to STRENGTHEN the US Dollar. And sure enough, since March 16, the anticipation of higher rates HAS strengthened the US Dollar. Although the Fed did not break the string of 0.25% rate rises at this meeting, and although the word "measured" as a modifier of future rate rises continues to be employed, the addition of the sentence quoted above has fuelled anticipation of more and bigger rate rises to come, and this has in turn fuelled anticipation of a higher Dollar.
The mind boggles.
We were going to use this week's GTW to eviscerate this ridiculous notion, but we found an article on the web which does the job with elegance and thoroughness. It is by Mr Peter Schiff and appears on 321Gold. The title of the article is "If You Think Higher Interest Rates Will Help the Dollar, Think Again!" We HIGHLY recommend that you read this article. Mr Schiff does an admirable job.
Take any slice of time since the closing of the Gold window in 1971 and the advent of the global floating currency system in 1973. Identify the times when US interest rates (official and "unofficial") were rising. You will find that the US Dollar was falling. Take any slice of time when the US Dollar was falling. You will find that US interest rates (official and "unofficial") were rising.
Take any currency crisis affecting any currency over the last 40 years. Look at the events which were going on when the currency in crisis was falling the fastest. What was happening to the interest rates of the nation whose currency was so affected? In every case, without exception, they were SOARING upwards.
Why does this happen, inexorably and every time? It is because of the NATURE of interest rates. Any interest rate, no matter how distorted it might be by government fiat, contains within it three components. We have discussed these components many times both in these pages and in The Privateer. Here is piece we wrote on the subject back in October 2002. The two components of the interest rates which are significant here are the "risk premium" and the "price premium". Both of these components vary, as explained in the article, with the level of risk seen in holding debt paper denominated in a given currency. Both of them rise as the percived level of risk rises.
In a currency "crisis", the perceived levels of risk spike skywards. So do market rates. And so, with a short lag, do official rates, the officials having no choice if they want their currency to survive at all.
The RISKS involved in the US economy, and therefore for holders of all US assets including US Dollars, do not need much elaboration to anyone who has followed our work for any length of time. Nor should they need any after having read Mr Schiff's admirable piece linked to above. Even Mr Greenspan has been constrained in several of his recent public utterances to mention some of these risks. But in its official capacity, the Fed is not directly concerned with the risks themselves, they are concerned with the PERCEPTION of the risks.
We return to the quote from the FOMC press release which accompanied the March 22 rate rise. Here is the important phrase: "longer-term inflation expectations remain well contained".
If Mr Greenspan and the Fed know anything, it is this: The point at which they lose control of the "longer-term inflation expectations" of those inside and especially outside the US who hold $US denominated assets is the point at which they lose the whole ball game. That is the point where currency crises are born, and having been born, they tend to mature with harrowing rapidity.
Here is the financial and economic situation into which Mr Greenspan and Mr Bush have plunged the US
There are MANY other factors involved, but the above will do to be going on with.
What has happened on the "markets" is classic. The CRB index, which got as high as 322 on March 16, is now down to 306. The $US Gold price has lost $US 14.90 this week as the $US index gains 2.01 points. Clearly, "long term inflationary EXPECTATIONS" remain in check. We don't know how long they will REMAIN in check any more than you do. But what we DO know is that to expect a STRENGTHENING US Dollar as the Fed continues to raise rates, or accelerates their rate rises, is the height of economic absurdity.
It had to come to this eventually though. The post 1971 US Dollar based fiat currency system is reaching the "in extremis" phase. With that inevitably go ever more hare-brained analytic distortions together with ever more desperate attempts to keep people from acting in their best interests. When the suppression of "long term inflationary expectations" becomes a matter of financial life or death, Gold is the first target. So it is now. We'll see how long this mass delusion can last.