Mike’s Financial Pocket: June 14, 2013

Is the Fed about to hike rates? Not so fast, says Fed mouthpiece WSJ reporter Jon Hilsenrath:

Since last December the Fed has been promising to keep short-term interest rates near zero until the jobless rate reaches 6.5%, as long as inflation doesn’t take off. Most forecasters don’t see the jobless rate reaching that threshold until mid-2015.

 

At the same time, however, the Fed is talking about pulling back on its $85 billion-per-month bond-buying program. The chatter about pulling back the bond program has pushed up a wide range of interest rates and appears to have investors second-guessing the Fed’s broader commitment to keeping rates low.

 

This is exactly what the Fed doesn’t want. Officials see bond buying as added fuel they are providing to a limp economy. Once the economy is strong enough to live without the added fuel, they still expect to keep rates low to ensure the economy keeps moving forward.

 

It’s a point Chairman Ben Bernanke has sought to emphasize before. The Fed, he said in his March press conference and again at testimony to Congress last month, expects a “considerable” amount of time to pass between ending the bond-buying program and raising short-term rates.

 

He seems likely to press that point at his press conference next week, given that the markets are telling him they don’t believe it.

The Fed does not want to spook the markets and throw the economy into a free-fall, again. At the same time, the Fed does not want to stoke inflation. So Helicopter Ben is walking a tight-rope here. Maybe Bernanke is lucky, since the BLS reported May 2013 inflation to be “merely” 1.1%

My question is this: if I’m to believe that inflation is barely 1%, why are food, fuel, education, and health care so darn expensive? (Spoiler alert: government intervention into the free market, especially by regulation, affects prices in a negative way).

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Two and a half million for a one thousand dollar bill? Good deal?

A bidder paid that much for an 1891 Silver Certificate with a face value of $1000 at a Stacks Bowers auction.

I have always had an interest in old money, especially old paper money. Here are a couple meaningless and fun observations I’d like to share.

  1. $1000 in silver dollars (when we had redeemable paper, prior to 1965) totaled approximately 700 ounces worth of silver, which translates to roughly $15,000 in today’s dollars;
  2. In order for $1000 to compound to be worth $2.5 million, it would have needed to earn 2.5%, compounded monthly, for over 110 years. Wow. In other words, the bill appreciated in value much more than 700 ounces of silver bullion would have.

Imagine having one of these bills tucked away in a safe somewhere?

In case you are not familiar with the term, redeemable paper means that the paper money was actually backed by something tangible. Prior to 1933, paper money issued by the federal government could be “redeemed,” or exchanged for gold coin of equal denomination. Prior to 1965, paper money could be exchanged for silver coins in a similar manner. That’s not the case anymore, for better for for worse.

Although we have not yet seen serious inflation here as a result of Ben Bernanke’s “Quantitative Easing” (money printing), it really needs to be noted that up until 1965, you could exchange your dollars at the bank for a “silver dollar,” which contained roughly .7 ounces of silver. The ability to redeem paper currency for gold or silver (which could not be debased, or “eased” quantitatively) led to a period of dollar stability, fiscal restraint, and prosperity. Alan Greenspan noted this in his essay “Gold and Economic Freedom:”

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

Wise words, indeed.

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The Nikkei dropped another 800+ points on Wednesday, though it looks like it will rebound and gain back some of the loss in the overnight session starting Thursday. Readers of Mike’s Finanical Pocket know I discussed Abenomics a few times before. The Yen has dropped well below 95 to the dollar, its strongest level since early April 2013 (remember: less Yen per dollar means the Yen has gained strength). A drop in the Yen spooks the Nikkei (Japan’s equivalent of the “S&P 500″ or “Dow Jones”). The Nikkei is down 20% from its most recent high, which is referred to as a “bear market.”

I am no market professional (so this is not any sort of financial or trading advice), but I think that the Nikkei is a bit oversold here and due for a bounce. I do not think that the “sugar-high” from Abenomics has worn off completely. Indeed, some are calling for the Nikkei to hit 18,000 by year end. What happens afterwards? Will there need to be more stimulus to maintain the artificial stock market price inflation? Or will the Japanese economy break out of its decades of slumber? The fact that the world is addicted to monetary stimulus and the fear of the Fed or the Bank of Japan not being there to support the stock markets is troubling, to say the least.

As always, free markets are better markets.