Friday, March 25, 2011

Invading Extremistan

With the U. S. engaging in increased military activities under a "peace" president, it appears apt to use a military metaphor to our Washington-directed economic/financial policy.

As with storage of nuclear fuel and Palestinian refugee camps, often there is nothing so permanent as that which is "temporary". So it seems with ZIRP, the famous zero interest rate policy that was introduced as an emergency measure late in 2008. In Talebian terms, the U. S., via the central authorities working through the Federal Reserve Board of New York as the implementer, has invaded monetary Extremistan and looks to be building an embassy there. The authorities mean to stay a while.

Just as the pace of price increases collapsed from double digits to low single digits rapidly following the reintroduction of high interest rates in late 1980 through 1982-3, with a resulting double dip and severe recession, so may price increases surge surprisingly rapidly as stimulative fiscal and monetary policies continue apace. A sudden and substantial rise in price inflation has happened many times before in America. I cannot think of one reason why it will not happen again, and I think it is happening now. (This is not the same as hyperinflation.)

I think that people who expect important price declines in housing and stocks are correct in real terms, but I think that's a dubious (but possible) proposition in nominal terms.

We simply may have entered a period where, even with an ounce of gold above $1400/ounce, a saver is taking more risk with a (say) 2-year certificate of deposit than with ownership of gold in a cost-efficient manner.

The occupation of financial Extremistan has been going on so long that the natives are beginning to accept ZIRP as normal. It is not normal at all. The old rules simply may not apply. The War on Savers began in 2001 and except for a brief period in 2006-8, continues.
Resistance is not, however, futile.

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