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It is obvious
to me that the world of economics has now fully entered the Twilight Zone. As
evidence, last week, European Central Bank Head Mario Draghi
pledged to quote, "Do whatever it takes preserve the Euro. And believe
me, it will be enough." In this upside down world of phony Keynesian
Economics, doing "whatever it takes to preserve the Euro"
apparently now means promising to dilute the purchasing power of the currency
into oblivion.
The ECB plans
to use their hoard of freshly-minted counterfeit money to purchase the
insolvent debt of bankrupt nations. Incredibly, the ECB's dedication to
create unlimited inflation actually served to send bond yields much lower.
The Italian 10 year note plunged 77 bps and the Spanish 10 year note dropped
by 88 bps just days following the announcement. What's more, the Euro
unbelievably rallied to a three-week high.
Sane
individuals realize that the ebullient reaction from Southern European
currency and bond markets can only be temporary at best. True economic
principles are as immutable as those that exist in mathematics and science.
One of those principles is that a central bank cannot pursue a massive
inflationary policy without sending its currency and bond market crashing in
the long term.
"To the
extent that the size of the sovereign premia
(borrowing costs) hampers the functioning of the monetary policy transmission
channel, they come within our mandate," Draghi
also said at an investment conference in London. By saying that, the ECB
president has unwittingly committed to endless money printing. Which would if
executed to its fullest extent, send Europe into an inflationary death
spiral. That is, a situation where there is no longer a private market for a
country's debt at current yields and the central bank becomes the predominant
buyer. Therefore, they must continuously and massively print money in an
effort to stop yields from rising. Otherwise, debt service payments would
bankrupt the nation and cause a severe depression. However, those very same
hyperinflationary actions of the central bank force borrowing costs to surge
despite those efforts to artificially manipulate rates lower. Thus, the
economic destruction occurs regardless, albeit with greatly increased
intensity.
Not to be
outdone by their European counterpart, the Wall Street Journal reported last
week that the Fed would soon act to spur America's faltering economic growth.
Friday's anemic 1.5% GDP number only served to underscore that notion. In
fact, NY Senator Chuck Schumer scolded Mr. Bernanke recently saying,
"Get to work Mr. Chairman." Apparently, Mr. Schumer doesn't think four
years of zero percent interest rates, a promise to keep them at zero until at
least the end of 2014 and printing $2 trillion, doesn't amount to doing much
of anything and it is time for Mr. Bernanke to do something really
extraordinary.
Joining Mr.
Schumer was former Vice-Chair of the Fed Alan Blinder, who wrote in the
Journal that the central bank should not only consider stop paying interest
on excess reserves but should also charge banks interest on reserves that
they don't loan out. That action would undoubtedly lead to an explosion of
money supply growth and rising prices.
It is now
becoming blatantly apparent that the central banks of the developed world are
becoming desperate in their pursuit to fight deflation. And despite what the
perennial deflationist contend, a central bank can always create inflation
when they so choose. All they need is a firm commitment to destroy the value
of the currency and have a government that is compliant towards that goal.
That situation is quickly coming into fruition in Japan, Europe and the
United States.
In preparing
your portfolio to prosper during rapidly rising inflation you must also try
to get the timing correct. The time to gear away from deflation is
approaching quickly. Having some exposure to precious metals and writing
covered calls against the position is currently a good strategy. Then, you
must be ready to deploy a good proportion of your assets in the precious
metal, energy and agricultural sectors once the Fed and the ECB follow
through on their threats to take even greater steps to destroy their
currencies. From all available evidence, that day is now fast approaching.
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