Tuesday, April 19, 2011

Inflation + Debt = Higher Interest Rates

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is now kicking into high gear.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation - producing a paradox that many have difficulty reconciling.

Last Wednesday we noted that CNBC was reporting something that we have said for over 2 years now... that if you go back to the way inflation was calculated prior to 1999/2000 (when all the important components of inflation were stripped from the calculations to hide it's true impact) that inflation is actually raging at almost 10% right now.

But now even the highly manipulated current inflation calculation method is unable to disguise what is going on.

As the Wall Street Journal notes, Canada's consumer-price index jumped by its biggest monthly increase in two decades, adding Canada to the list of major economies recently pressured by inflation.

  • "The jump surprised economists and analysts here, many of whom had been comforted by so-far benign inflation pressure across Canada, much of that thanks to a strong Canadian dollar. It also raises the likelihood of an interest-rate increase by the Bank of Canada, the central bank, sooner this year rather than later. Some economists had pushed back their forecast timing of such a hike after the Bank of Canada, which kept rates steady last week, offered a less hawkish tone on future action than many had expected."
Meanwhile in the US the big news is that the ratings firm Standard & Poor’s lowered its outlook on the United States rating to negative. Although the agency did not actually lower its highest AAA rating on America's debt, it was the first time since the S.& P. started assigning outlooks in 1989 that the country was given an outlook that was something other than stable.

This has lead M&T Bank Corp. CEO Robert G. Wilmers to warn today that the United States "may be on the same calamitous path" toward an economic and government debt crisis akin to that of Ireland, Greece and Portugal if it doesn't rein it its ballooning spending and debt.

As this blog has said before, the story of this decade is going to be all about sovereign debt.  Gobs and gobs of sovereign debt.

The gridlock in American politics combined with the paltry spending cuts proposed only guarantee things are going to get worse.

Meanwhile, as Zero Hedge notes, the real beauty about waging a two front war (keeping gold from hitting the barrage of $1,500 limit spot orders; and silver from passing a dollar a day) means that the COMEX cartel has to pick its fights. Today gold loses for now, as the $1,500 spot (but not futures) price is safely defended. The same can not be said for silver. $44 was just taken out. And those who actually wish to buy American Eagles or Silver Maple Leafs can do so at the low, low price of $47.32

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