"Fed, Treasury move again to help financial markets
WASHINGTON (MarketWatch) -- The Bush Administration and the Federal Reserve said Monday they are moving "with substantial force on a number of fronts" to shore up confidence in, and protect, the financial system.
... Most recently, Treasury Secretary Henry Paulson announced Neel Kashkari, a close advisor, has been tapped to lead the $700 billion mortgage rescue effort ... In an early morning statement, the Fed said it would double the size of its emergency loan program to banks to a potential $900 billion by the end of the year ... The announcement came as the central bank announced that it will begin to pay interest on bank reserves. This will give the Fed "greater scope" to address conditions in credit market, the central bank said. Paying interest on reserves would give the Fed more power to implement monetary policy. Paying interest would attract excess bank reserves to the Fed, giving the central bank more firepower. Currently, banks deposit only the minimum reserve required ... Paying interest on bank reserves would allow the Fed to enlarge the asset size of its balance sheet without pushing the funds rate to zero, explained Robert Brusca, chief economist at FAO Economics. The interest rate paid on bank reserves would effectively serve as the floor on the funds rate ..."
The above actions, once again, are highly inflationary, I would think.
John Williams, who runs the website http://www.shadowstats.com/alternate_data in the U.S. has the inflation rate at around 13.7% in that country as of 19SEP2008 ¨C he arrives at this statistic by calculating the CPI the same way it used to be calculated in 1990 (before the US powers-that-be began to fiddle with the numbers to hide the real state of affairs). As of 26SEP2008, he had the M3 money supply at 14%. And this was BEFORE the recent USD700billion bailout package.
I think there is little doubt that the people pulling the levers ¨C and not only in the States, but around the world ¨C are set on a course of trying to inflate their way out of the current situation. It will take a little while for these measures to really ¡®bite¡¯.
Of course, it is now common wisdom that precious metals are a good place to park your wealth, but, if you are like me, you are probably holding a basket of mining and other commodity shares, which, despite knowing for a long time that all of this was to come about, you have held onto as they¡¯ve slipped steadily further underwater. To sell now would cement a position of substantial loss. So, it is a choice of either accepting this loss and selling up, or holding for very possible a very protracted period. They say that, following the Great Depression, it was about 26 years before share prices got back to their pre-Depression levels. In my case, I¡¯ll most likely be dead before that happens should things play out in a similar way this time round.
But some things are quite different this time around. For one thing, unlike Japan when it slipped into a deflationary situation in the early 1990s, the world¡¯s biggest economy (the US) is the world¡¯s leading debtor nation instead of being a creditor nation as it was at the time of the Great Depression. Moreover, so many nations in recent years have been inflating their money supplies ... in a number of cases (including Australia), to a greater degree than the US. Just as with any other commodity, the more there is of it, money becomes worth less and less. I feel there is more and more evidence of late that we are indeed heading for substantial inflation ... possibly of the ¡®hyper-¡¯ kind eventually, a la Zimbabwe.
So, I¡¯m feeling quite comfortable holding my commodities and energy shares (which - although speculative and with share prices currently under 50cents - in most cases are fairly well funded, i.e., $20m or more). If indeed we ARE headed for significant inflation, then the prices of commodities of any kind will go through the roof. If cash becomes increasingly worthless, then how do you preserve your wealth if not by holding ¡®things¡¯? The question is how long it¡¯s likely to take.
Of course, none of us know for sure how this is going to play out, but I¡¯d be curious to know if there are many others who are taking a view similar to mine.
cheers,
Tez
As you can see from the fact that I was not smart enough to jump out at the top, or anywhere near it, that I¡¯m no market guru and that you ought not regard any of what I¡¯ve written above as advice or recommendation on how to invest or act in the markets. It is not intended as such.
