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By Staff | Apr 17, 2009

Ben Bernanke’s recent announcement that the Federal Reserve would monetize some long term bonds issued by the Treasury was outwardly the most striking inflationary act since the Continental Congress financed the Continental Army.

The gold market soared and the dollar plunged on the news. Afterward neither added to those gains or losses. The U.S. does have the advantage of issuing debt in its own currency, which it can print. The U.S. has enormous wealth. It can afford the liabilities that its government is acquiring, but not without fiscal and political consequence.

Republicans spent enough and borrowed enough to double the U.S. debt from $5-10 trillion. Democrats would double the debt again, having to both tax and borrow to invest, finance and socialize our liabilities.

When Republicans criticize that Democrats spend and borrow too much, what has changed? Oh yeah, Democrats will pay for some of their spending with higher taxes, while Republicans just borrow the full amount. Republicans can make that point, but it is nothing that they should be proud of.

While the recent surge in gold and the setback in the dollar ignited a surge of inflation sentiment. Market actions since suggest that deflation forces are still the more powerful. Wage and price inflation is defined as too much money, chasing too few goods and services.

It appears that the Fed is going to have to monetize a lot of debt to put enough cash in circulation to fuel inflation, a lot more than they have announced to date.

The rally to the high last year in gold appears to have completed a 5-wave advance that unfolded since 1999 and the secondary high set by the Fed’s debt monetizing news appears to have set a B-wave high of an unfolding correction.

The gold market should fall back below the 680 low set last October before it makes new highs. In other words, we still have a period of deflation to endure before the economy will re-inflate again . . . meaning this inflation concern is early.

Wages, salary and employment are deflating, the impact of which has not been fully absorbed by the financial system yet. More credit problems will result. Production capacity has been built for a fully consuming U.S. economy, one that saved nothing. With the global recession idling enormous production capacity, this consumption deficit is deflationary.

The reverse wealth effect will depress asset values and economic activity for some time. The commodity producing sector of the global economy is the least negatively impacted of all sectors to date.

But energy and meat industries are struggling to reduce production to depressed levels of demand. When we reflect on the general skepticism over strength in the U.S. dollar, what many are really evaluating is how long the illusion can go on?

My answer would be “for some time yet.” It’s my belief that there is a greater chance, short term, of the U.S. dollar trending much higher than falling below Dec. 2008 lows. Someday, the dollar may be replaced as the world’s reserve currency, but likely not in my lifetime. That will be a very long term event (I hope.)

Despite the severity and complexity of our economic problems, the U.S. has proportionately greater resources than other nations do when dealing with them.

We also have many systemic advantages working for us in the global economy. The same kind of creativity that got the U.S. into this financial crisis is being employed to get us out.

Unfortunately, a lot like with Dr. House, trial and error with diagnosis and treatment may come close to killing the patient before they get it right.

I’m not sure that they have got it right and some, those with awards in economics a lot smarter than you and I on this subject, are convinced they still have a lot of it wrong relative to the treatment being given to toxic debt and regulation.

When they get hit with a freeze in Kansas and Oklahoma damaging jointing wheat and they can only rally the Kansas City wheat market a few cents before closing sharply lower, then enthusiasm for commodities has waned.

I said that we’d miss the speculators when they were gone and Congress is looking intently at barring the door to their return. They don’t want high commodity prices and are engineering legislation to undermine investment in commodities that they will eventually regret. Nobody will go long in markets rigged to benefit shorts.

Some day it may be very enticing for governments in debt and tired of disappointing economic growth, to inflate; but not until they get the debt financed first.

They need to keep the dollar up and gold down for a while yet before they can set the hook into those who’ve lent to industrialized nations.


Not yet, but likely later.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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