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November 4, 2010
Fasten your seatbelts!
On November 3 the Federal Reserve announced they will buy back over $600 Billion+ of the debt being created by the United States, in essence printing more dollars. Their stated reason is to jump start the economy by making more money available for lending and to offset an overblown fear of deflation.
Admittedly there has been a relatively low inflation rate in the country over the past two years. That has been due to a dramatically reduced consumption and spending rate by the populace that is either unemployed, concerned about becoming unemployed or hoarding their money in fear of what the Government may do to them.
In many circumstances manufacturers have been absorbing their own increased costs in an effort to maintain sales volume. But this cannot go on much longer. The bellwether of future costs and potential inflation can be ascertained by reviewing the cost of commodities used in the production of food, energy and other consumer items. At some point these prices will have to be passed on and that trend has already begun.
A comparison of a number of major commodities, their prices today versus a year ago is as follows: (http://money.cnn.com/data/commodities/)
Oil (light crude) Nov 2010 $86.43 @ barrel Nov 2009 $73.55 17.5% increase
Corn (Dec Contract) 5.93 @ bushel 3.43 72.3%
Soybeans (Jan Contract) 12.69 9.00 41.0%
Sugar (March Contract) 31.28 15.77 98.3%
Copper 3.91 @ lb 2.89 35.3%
Gold 1,337.60 @ oz 1,081.00 23.7%
A partial reason for these price increases is the decline in the value of the dollar deliberately initiated by the Federal Reserve and the Obama Administration as direct result of their monetary and fiscal policies. Since November of 2009 to the present, the dollar has lost nearly 12% of its value against the Japanese yen. There is also an increased demand for the materials, as many countries outside of the United States are experiencing economic growth, and there is an element of speculation as traders are betting that the dollar will continue to decline and inflation will rear its ugly head with a vengeance in the United States.
That appears to be more and more of a certainty. As the above chart shows, the prices for those and virtually all commodities have risen dramatically and can no longer be absorbed by the manufacturers and middle-men, the cost must be passed on.
The announcement by the Federal Reserve to create more liquidity by quantitative easing is a major and dangerous roll of the dice, particularly when combined with the policies of the Obama Administration regarding taxes, spending and regulations. Inflation is already in the pipeline and these actions may well have a devastating effect as inflation and further devaluation of the dollar could engulf the economy.
As the character played by Bette Davis in "All About Eve" once said: "Fasten your seatbelts. It's going to be a bumpy night".