The aftermath of dramatic balance sheet expansion is bound to be a rebound in inflationary pressures, but Fed Chair Ben Bernanke said the central bank is not going to react to a short term increase in current inflation.
Basically, if the FOMC is convinced that a rise in inflation today is going to be reversed in the future, they are not going to do anything to offset it with a rise in benchmark interest rates.
So, if inflation picks up in the here and now, then that is not going to worry Ben Bernanke because he is going to look beyond that to the future.
Unpredictable Flow and Predicting the Aftermath
Strangely, Bernanke specifically said that he is not going to look at increases in the price of globally traded commodities. That means inflation in oil, food, energy and basic materials, which includes key commodities — like silver — that are essential to each of those sectors.
It seems that if all of the Fed’s recent money printing activities creates an increase in oil prices or food prices, Ben Bernanke is not going to care. Of course, the net effect is going to depreciate the U.S. Dollar, which the world is already selling, so perhaps you should too.
When it comes to guessing which way the hot money will move, inflationary monetary policy offers no real control over where that highly liquid capital flows to.
It's All About Interest Rates
How does the Fed propose reversing inflation? Well, by raising interest rates and then attempting to sell the toxic securities on its balance sheet.
Nevertheless, rising interest rates after the greatest expansion of sovereign debt the world has ever seen will immediately crater a fragile economy already teetering on the edge. Market interest rates would soar and should easily eclipse tax revenue collections.
The Fed obviously knows this, and it will continue to manage perceptions as long as the market consensus is willing to believe or their survival depends on it. The U.S. central bank has already discounted the future by many generations in the hope that markets will follow its increasingly tenuous lead.
Banks’ Market Manipulation Facilitates Charade
Many participants in the market now know that the manipulative actions of central banks have made prices in financial markets essentially meaningless.
By controlling interest rates, the central banks have destroyed interest rates’ important function of providing information about holding intrinsically valuable assets like silver and gold.
In the meantime, the age of sub-$100 silver hangs in the balance between bullish fundamentals and the ability of bullion banks to pull off the modern equivalent of alchemy by turning metal into paper as captured regulators look the other way.
This charade can only last so long.
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