William Thien

Is The Latest Word from The FED, “Get Ready for Hyper-Inflation?” Looks that Way.

Posted on: August 14, 2011

Last week’s announcement by the Federal Reserve Bank that it is unlikely to raise the prime lending rate until 2013 SoUndS good…at first.

Great! Borrowing money will be cheap for the time being.

At the very least, the announcement should create some economic stability, you would think.

On the same day there was a note mentioned as an aside that we should expect food prices to rise on average four to five percent this year. What’s four or five percent? Ten years in a row, it can be substantial. But immediately, it’s nothing really. The explanation for the increase was that production costs are up. But they generally are talking about things like milk and eggs when they mention such price increases. Milk and eggs are commodities that are subsidized by the government. Packaged goods will likely go up much more. Watch.

The problem with keeping interest rates down is that it artificially stimulates the economy and causes inflation. It’s like printing money: more money available, less value to the money. I discuss some of the negative aspects in an essay titled Why is the Federal Reserve Deliberately Stimulating Inflation?

The real reason The Federal Reserve Bank has been keeping interest rates low for the last two administrations and the second half of Clinton’s Administration is that we are in a political climate that does not allow increasing taxes. To increase taxes is political suicide. You may as well forget about getting elected if you “promise” to raise taxes.

Consequently, in order to increase tax revenues, the government, in this case it’s The Federal Reserve Bank, creates economic policy that drives up the cost of things and as a result increases sales tax revenues. The more expensive things are, the more sales taxes they bring as a direct proportion. It’s that simple.

The FED is driving the price of things up, instead of letting the market work itself out, in order to increase tax revenues. This is my own hypothesis, by the way, so feel free to chime in.

Furthermore, it restores people’s faith in the hyper-inflated values of their property, property of whatever type. In this way, governments can justify outrageous taxation. “Yer house ain’t worth that much but we’re gonna tell you it is so we can screw ya on them taxes, you know.”

Instead of letting the market correct itself so we can get on with things, the government is deliberately stimulating inflation, stirring things up, tinkering, that’s right, tinkering with the economy by keeping the Prime Lending Rate down only to justify higher taxes.

Otherwise, why is there such a fear on behalf of the government to let the markets correct themselves? What other reason is there for the government to keep constantly intervening in the economy with these monthly announcements about the Prime Lending Rate?

Now that they have taken the economy to absurd valuation extremes in terms of market values and commodity prices, now that they have used the final tool left in the economic tool box, making more money available with a prime lending rate of practically zero, what is left to do when things stall, when the market realizes things are not properly valued and go into market free fall as the economy runs out of the real fuel that drives it? Because bottoming out the prime lending rate is the last resort. That means that quite possibly the next correction is going to be the real correction, the big one, and there won’t be anything else anyone can do.

Copyright © William Thien 2010

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