Editor's Note: Our colleague Dan Amoss, editor of Strategic Short Report, is back with his take on the Fed's pro-inflation strategy. Enjoy… Embracing Inflation
By Dan Amoss
November 17, 2008
The battle between credit contraction and government-sponsored inflation rages on. For several weeks, the forces of credit contraction have been winning.
There are fears that banks will never expand lending again, and that everyone with debt wants to pay it down as fast as possible. I think these fears are excessive. They ignore the massive and limitless inflation schemes coming from the Treasury and the Fed. Those fearing deflation assume that every American consumer is stereotypical: an overextended, credit card-addicted, house-flipping gambler. This is simply not the case. Many Americans don't have a mortgage. And most Americans with mortgages are still making their payments. They have, however, temporarily reigned in discretionary spending because of falling house and stock prices. *************************************** Even the U.S. government admits this single seismic event may cost us over $4 trillion... And it's ALREADY HAPPENED... Do nothing, lose everything. Or you can make as much as 668% on the 12 stocks set to rocket as this next new round of "petro-chaos" unfolds... Click here to find out how… *************************************** Those fearing deflation also assume that demand for debt is low and falling. But demand for debt doesn't always come from businesses or households looking to invest more or spend more. Any business or household looking to refinance existing debt at lower rates — and there are many — is a source of demand for new debt. Banks borrowing at the Fed window at 1% or less will be looking to supply this new debt by make highly profitable loans to creditworthy borrowers. Once borrowers refinance, they may not be as aggressive about spending or expanding business as they used to be. But at least they will have access to credit. In the Great Depression, they did not. So the economy fell into a negative feedback loop of asset sales, bank failures, and rising unemployment. Treasury and the Fed will keep taking extreme measures to slow down the pace of credit contraction and housing prices — cutting off this deflationary feedback loop. This could include nationalizing Fannie Mae and Freddie Mac and using the Treasury's low borrowing costs to refinance hundreds of billions in existing mortgage debt into new 40- or 50-year mortgages with reduced principal balances. *************************************** Get a FREE Copy of the Just-Released I.O.U.S.A. DVD... Here's how you can own the award-winning I.O.U.S.A. documentary FREE on DVD...over a month before it's even available to the general public! *************************************** Sure, such an action would guarantee a decade or more of stagnation in housing prices, but it will also slow or flatten the rapid decline in prices. This is the essence of the Treasury and Fed actions: to stop the deleveraging from getting out of control — even at the cost of future economic stagnation. Like it or not, I think this is the most likely outcome from this crisis. If this new debt is too much for savers and foreigners to absorb, I'm sure the Fed would set up an Enron-style conduit to buy up, or "monetize" new Fannie Mae paper. Remember, Fed Chairman Bernanke believes that the Great Depression and the Japanese deflation grew steadily worse because the government and central banks weren't radical and decisive enough in their pro-inflation policies. So there's every reason to expect radical new inflation policies in the coming months. Best Regards,
Dan Amoss P.S.: I recently outlined a strategy for my readers with a 200% profit potential that's designed to take advantage of the Fed's pro-inflation tendencies. You can learn more about Strategic Short Report, and join my readers here… Editor's Note: As always send any questions or concerns to us at jim@pennysleuth.com.
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