September 26, 2011

Powerless

“Experience, however, shows that neither a state nor a bank ever have [sic] had the unrestricted power of issuing paper money without abusing that power; in all states, therefore, the issue of paper money ought to be under some check and control; and none seems so proper for that purpose as that of subjecting the issuers of paper money to the obligation of paying their notes either in gold coin or bullion.”
–David Ricardo”

Flawed Central Planning (What Other Kind Is There)?

On September 21 the Federal Reserve Bank announced it would invest $400 billion in long-term Treasuries over the next nine months, with money raised by selling its holdings of short-term U.S. Government debt.[1] While the Fed’s move is ostensibly designed to lower borrowing rates across the board, improve employment, and create price stability[2] – I believe it reveals, at this stage of the game, how powerless the monetary central planners of the Fed truly are. Then again, it’s always been my opinion government central planning is anti-free market, unnatural, and thus in the end always flawed.

Worse Than It Seems

The Fed Board of Governors’ statement, “…Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets…” is eye-catching. For starters, it looks to me like the Fed is admitting it’s $trillions in previous stimulus (money printing/debasement of the Dollar) – is not working. Also, it’s my belief the Fed often tries to spin things more positively than they really are when the situation is bad. To me, this not positive sounding at all statement by the Fed translates to – “Things are extremely bad and could get a whole lot worse.”

Out Of Control

It’s my opinion the United States fiscal scenario is completely out of control, and the Federal Government is hopelessly indebted — with no way of meeting it’s obligations without debasing the currency it must meet them with. I see the latest Fed move having very little (if any) stimulative effect on the economy. The markets’ immediate response to the Fed’s announcement was a big thumbs down.

Putting Off The Hangover

I think the Fed should step out of the way. The long-term credit-fueled party of the last 40 years should come to an end. American citizens and the Federal Government should get their fiscal houses in order. Credit and the money supply should be allowed to contract. Prices should be allowed to drop dramatically. And the resulting strengthening of the Dollar’s purchasing power should take place – rewarding savers.

But therein lies the rub. It’s my firm belief the last thing a massively indebted government wants, is to pay back the $trillions it owes in stronger Dollars. Thus, it’s my opinion the Fed-led debasement of the Dollar (and resulting competitive global currency debasement) will continue. And accelerate.

And we plan accordingly.

While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – we believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.

Sincerely,

Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

[1] New York Times, “Fed Will Shift Debt Holdings to Lift Growth” September 21, 2011
[2] http://www.federalreserve.gov/newsevents/press/monetary/20110921a.htm