Is the Federal Reserve Right About Inflation?

The Federal Reserve

The Federal Reserve serves as the Central Bank of the United States, and whether you realize it or not, it plays an active role in the lives of every American. It makes decisions about monetary policy and interest rates that have a direct impact on the market and an indirect impact on everyone. The FED uses inflation targets to determine how much they can devalue (inflate) the currency. Many people believe that they created a massive money printing scheme cryptically called “Quantitative Easing“since QE1 converted almost worthless mortgage backed securities into currency.

The Fed regularly issues statements about how inflation isn’t really as bad as everyone says it is. [Read more...]

How “Excess Reserves” and the Money Multiplier Could Trigger Inflation

Banks have $2.5 trillion parked in “excess reserves”. This is money on deposit with the FED. The FED pays a miniscule amount of interest on these reserves but the banks are willing to loan it to the FED because it is easy no risk income. But it is also the reason that the money multiplier is falling! And when the money multiplier is falling the FED has a very hard time increasing the money supply. So if the FED really wants to increase the money supply all it has to do is decrease the interest rate it pays on excess reserves and the banks will find some place else to deploy it. Which could trigger massive inflation. ~Tim McMahon,editor

A Fed Policy Change That Will Increase the Gold Price

By Doug French, Contributing Editor

Excess ReservesFor investors having an interest in the price of gold, the catalyst for a recovery may be in sight. “Buy gold if you believe in math,” Brent Johnson, CEO of Santiago Capital, recently told CNBC viewers.

Johnson says central banks are printing money faster than gold is being pulled from the ground, so the gold price must go up. Johnson is on the right track, but central banks have partners in the money creation business—commercial banks. And while the Fed has been huffing and puffing and blowing up its balance sheet, banks have been licking their wounds and laying low. Money has been cheap on Wall Street the last five years, but hard to find on Main Street.

Professor Steve Hanke, professor of Applied Economics at Johns Hopkins University, explains that the Fed creates roughly 15% of the money supply (what he calls “state money”), while the banks create “bank money,” which is the remaining 85% of the money supply.

Higher interest rates actually provide banks the incentive to lend. So while investors worry about [Read more...]

Inflation Expectations and the FED

As inflation expectations rise the FED has less and less “wiggle room” to stimulate the economy.  But how do you measure “inflation expectations”? In today’s article, Chris Ciovacco will show us. ~Tim McMahon, editor

Low Inflation Leaves Fed’s No Taper Door Open

Fed Lost Control In 2008

FED leaves door openIn early December, we used Japan as an extreme example of why central banks are terrified of allowing their respective economies to slip into a deflationary spiral. Do the same concepts apply to the United States? They do. The federal government offers standard Treasury bonds (IEF) and Treasuries that provide some protection against inflation (TIP). The law of supply and demand tells us that when demand for TIPS is greater than the demand for standard Treasuries, investors are concerned about future inflation. Conversely, when demand for TIPS is lagging demand for standard Treasuries, investors are not too concerned about inflation eroding the value of their interest payments. The chart below shows the S&P 500 (top) and the ratio of TIP-to-IEF below it. Demand for TIPS started to drop significantly in July 2008 (left of point A). As inflation fears plummeted, it helped foreshadow the big drop in equities between points C and D. The chart below helps us understand the Fed’s concerns about possible deflation. [Read more...]

Deflationary Forces Overpower FED

Despite Bernanke’s famous helicopter speech the FED’s powers really are not unlimited. There is only so much they can do to stimulate the economy. After all they can’t force people who are concerned about their future to borrow money. Just like a turtle people naturally recoil and pull back when times are uncertain. And even if they wanted to borrow bankers are reluctant to lend in uncertain times. This results in a phenomenon called Pushing on a String  where no matter how hard the FED tries very little force is exerted on the economy. Robert Prechter believes that this is exactly what has been happening over the last few years where the FED has been trying to stimulate the economy but the only effect has been an anemic rebound in the stock market.  ~Tim McMahon, editor

Deflationary Forces Stymie the Fed’s Economic Rescue Efforts
See a stunning chart of the Federal Reserve’s assets

By Elliott Wave International

The Federal Reserve’s efforts to rescue the economy have been historically aggressive, starting with the initial round of quantitative easing in 2008 and continuing through 2013.

The central bank’s assets have skyrocketed due to the Fed’s bond purchases, which you can see clearly in this eye-opening report that Robert Prechter presented to the Market Technicians Association and his Elliott Wave Theorist subscribers.
Download the full 8-page report for free here.

Federal Reserve Assets

The main reason investors are expecting runaway inflation is [Read more...]

Pushing on a String, Velocity of Money and Money Multiplier Conspire Against the FED

Under certain circumstances such as high national indebtedness, fear of bad economic times or when interest rates approach zero, monetary policy becomes ineffective in enticing consumers into spending more money.  Economists refer to this as “Pushing on a String” because if the basic demand doesn’t exist to induce people to spend money, it can’t be forced through monetary policy. Prime examples of this are during the Great Depression in the United States and in Japan since the 1990s. And as Lacy Hunt explains we are once again facing this problem in the United States since 2008. ~Tim McMahon, editor

Federal Reserve Policy Failures Are Mounting

By Lacy H. Hunt, Ph.D., Economist

The Fed’s capabilities to engineer changes in economic growth and inflation are asymmetric. It has been historically documented that central bank tools are well suited to fight excess demand and rampant inflation; the Fed showed great resolve in containing the fast price increases in the aftermath of World Wars I and II and the Korean War. In the late 1970s and early 1980s, rampant inflation was again brought under control by a determined and persistent Federal Reserve.

Federal Reserve Bank ChicagoHowever, when an economy is excessively over-indebted and disinflationary factors force central banks to cut overnight interest rates to as close to zero as possible, central bank policy is powerless to further move inflation or growth metrics. The periods between 1927 and 1939 in the U.S. (and elsewhere), and from 1989 to the present in Japan, are clear examples of the impotence of central bank policy actions during periods of over-indebtedness.

Four considerations suggest the Fed will continue to be unsuccessful in engineering increasing growth and higher inflation with their continuation of the current program of Large Scale Asset Purchases (LSAP): [Read more...]

The Case of the Disappearing Gold

When I was in the 6th grade (many, many years ago) my class took a field trip to New York City and visited the NY FED. The highlight of the trip for me was a ride down the elevator (or more precisely what was at the bottom.

The ride took forever with dozens of kids and one security guard in that tight stuffy space. Anticipation built as we went down what seemed like miles into the earth where the vaults rested on Manhattan bedrock. And what was in those vaults?

Gold! Lots of gold! Each vault had a name on it but not people’s names, countries names. After all in those days people weren’t allowed to own gold.

For years now there has been a controversy as to whether our (the U.S.) Gold is really in Fort Knox (or at least all of it). Ron Paul has been advocating for an audit of Fort Knox for years (in addition to an audit of the FED itself). In February 2013 the government released the results of their audit and surprise, surprise everything is just fine (nothing to see here, move along, move along). As a matter of fact, during the assay they found that some bars were actually more pure than originally thought so the government has increased its valuation of its gold holdings by 27 whole ounces! The audit process revealed that the NY FED houses 34,021 gold bars belonging to the United States, which sounds like a lot but according to SilverDoctors.com

As part of the audit, the Treasury tested “a sample of the government’s 34,021 gold bars” in the New York Fed’s vault five stories below Manhattan’s financial district. Why is this so significant?  As anyone with a simple calculator can discover, the Treasury department has just inadvertently admitted that rather than the official 8,133.5 tons the Treasury reports as the US’ official gold reserves, the Treasury’s actual physical gold stores at the NY Fed are a measly 466.57 tons!   While the Treasury does reportedly also hold gold at Fort Knox, several reports have claimed that up to half of the US Gold is held at the NY Fed! No wonder it will take the Bundesbank 7 years to repatriate 300 tons!

In our recent article, How the Golden Reset Button Could Drive the Price of Gold to $20,000. we told you that Germany wants its gold back. Could Germany be wondering if its gold is really in the N.Y. Fed? In this article Jeff Thomas from “International Man” takes a look at some of the implications of this issue. ~ Tim McMahon, editor

The Disappearing Gold

by Jeff Thomas

NY FED GoldDuring the Cold War, Germany moved much of its gold to New York in case the USSR invaded Germany. It was assumed at that time that the US would be a safer storage location, and of course, they could always ask to have it returned if they wished. But German citizens have become increasingly worried about the security of the 1,536 tonnes of German gold reputedly held at the Federal Reserve in New York. This has resulted in the Bundesbank pursuing repatriation of the gold, beginning with a request to view it in the basement of the Federal Reserve Building, where it is claimed to reside. Of course, the German government had received periodic [Read more...]

What are “Foreign Exchange Reserves”?

Will the U.S. Dollar Be Replaced as the World’s Reserve Currency?

Foreign Exchange Reserves are foreign money held by International banks for use in international trade and in an effort to diversify their holdings and hedge against the inflation of their own currency. The most common items bought and sold with their foreign exchange reserves are oil and gold. Up until 1944 the asset of choice was gold and it was used as the medium of exchange between countries to settle their debts. But in July 1944, delegates from the 44 Allied nations gathered in Bretton Woods, New Hampshire., and made the U.S. dollar  the reserve currency of the world. At that time, the dollar was pegged at $35 per ounce and thus rather than exchanging gold, the countries were able to exchange dollars, which at the time was considered “as good as gold”.

Foreign Exchange ReservesBut because of its reserve status the U.S. was able to pretend that the Dollar was still worth $35 per ounce of gold while quietly inflating its currency and thus eventually France called the United States’ bluff and demanded gold at $35 per ounce and Nixon was forced to admit that the Dollar was no longer worth $35 per ounce and he “closed the gold window” and the last link between the dollar and gold was severed.

But Nixon had another trick up his sleeve [Read more...]

Gold and the Federal Reserve

Gold-US Dollar Link

by Chris Vermeulen

The $1800 per ounce level continues to be a major technical resistance area for gold. After hovering near $1800 recently, gold moved sharply away from that level last week to close at $1735 an ounce.

Despite that, more fund managers and analysts continue to point to a bright long-term future for gold prices. John Hathaway of the Tocqueville Gold Fund says gold will reach new highs within a year. He based his forecast, like many others, on the fact that negative real interest rates look likely to persist as Ben Bernanke and the Federal Reserve continue to print money.

New York Federal Reserve GoldBelieve it or not, some mainstream analysts are also touting gold’s potential. Merrill Lynch analysts point to the correlation (discussed in a previous article) between the price of gold and the expansion of the Federal Reserve’s balance sheet since the start of QE1 in early 2009.

Based on the current path of the Federal Reserve’s balance sheet expansion, Merrill Lynch came up with two longer-term targets for the price of gold. They project gold to hit $2,000 an ounce next summer and to hit $2,400 an ounce by the end of 2014.

What is the Federal Reserve Gold Coverage Ratio?

Another way to look at gold and the Fed is the so-called gold coverage ratio. That is the amount of gold on deposit at the Federal Reserve versus the total money supply. According to Guggenheim Partners, the gold coverage ratio is at an all-time low of 17%. The historical average is about 40%, meaning that gold would to more than double to reach the average.

Looking at the Fed’s balance sheet is [Read more...]

What is the Real Purpose of the Federal Reserve?

The Federal Reserve-

Is the Federal Reserve really doing such a bad job… or does it actually do exactly what it’s supposed to do, but the average American is in the dark about what that is?

The Federal Reserve is merely a “Cartel” of Bankers whose primary purpose is to promote their own interests and not the interests of the American public. “They create money out of nothing, move it around a bit and then collect interest on it.” If your or I tried to do that we’d be arrested.

“The Fed’s sole purpose: keeping the banks afloat” – G. Edward Griffin

In this explosive video, Casey Summit speaker G. Edward Griffin, author of The Creature from Jekyll Island, talks about the Fed’s real role in the US economy and why – contrary to common belief – it is not this banking cartel’s mission to act in the best interest of the American public.

 

Hear the full details of what G. Edward Griffin believes is the true endgame for the United States and the Western world – plus, listen to 27 other experts and find out how to invest, survive, and thrive in an economy weighed down by government meddling, cronyism, and financial fraud. Click here for more.

What is the Fiscal Cliff and How is it Affecting the Economy

The fiscal cliff that is the current hot topic in the news is a combination of automatic spending cuts and tax hikes that are scheduled to go into effect at the end of 2012 and the beginning of 2013. The spending cuts were triggered when congress failed to reach a deficit reduction agreement during last years debt ceiling debate.

Fiscal CliffThe tax increases are also automatic because Congress failed to make the “Bush Tax Cuts” permanent opting instead for a more politically expedient temporary tax reduction. In other words, they “kicked the can down the road” and it landed at the end of 2012. Perhaps they were hoping the Mayans were right and the world would end before  they had to deal with the issue again.

But so far the world hasn’t ended but fiscally the end may be nearer than we think.

[Read more...]