By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
This week, the Federal Open Market Committee (FOMC) is holding their regularly scheduled two-day meeting on Tuesday and Wednesday. As usual, at the conclusion of the meeting, a brief statement will be issued. These statements are among the most highly scrutinized of any government pronouncements.
The reason they are analyzed in depth is that they theoretically give indications of both short- and intermediate-term government economic policy. Even slight changes in wording such replacing the word “should” with “may” are given serious consideration by analysts.
For some years now, the FOMC announcement has been as much as an exercise in hiding government policy as it is in revealing it. For instance, the statement issued after the end of the last meeting on May 1 said that the Fed would continue inflating the US money supply by $85 billion per month. This inflation is accomplished by the Federal Reserve’s purchases of US Treasury debt. The announcement was consistent with pronouncements from the previous meetings.
However, later in the document was another sentence that left market analysts uneasy. The FOMC said, “The Committee is prepared to increase or reduce the pace of its purchase to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”
Why did this one sentence scare the market analysts? The answer is simple. The US government has been doing all it could to pretend that the US economy is improving. If the economy really was improving, that theoretically would lead to less need for the Fed to inflate the US money supply. That would be good news, wouldn’t it?
Well, not if you are the US government. The Fed has actually been inflating the US money supply by at least $100 billion per month lately. This increased money supply has gone into shoring up banks, subsidizing riskier home purchases, propping up US stock prices, and holding down the interest rate that the US Treasury pays on its debt. Reducing this inflation of the money supply would result in shakier banks, a slowdown in home sales, falling stock prices and higher interest rates for the US Treasury.
This overall wishy-washy pronouncement by the FOMC has analysts and investors scared. Will the Fed continue its massive inflation of the money supply or will it taper off? One reaction to the fear of the mere possibility that the Fed may reduce its purchases of Treasury debt is that the 10-Year Treasury Note interest rate has increased 23% from the end of 2012! On more than $16 trillion in Federal debt this change in the interest rate is adding more than $5 billion per month to the Federal budget deficit.
The bad news is that the Federal Reserve is trapped. Any reduction to the inflation of the money supply will pop the bank bubbles, housing bubbles, and stock market bubbles. The average American would consider any of these events to be catastrophes. Therefore, the Fed has no choice but to maintain and inevitably increase future inflation.
That being said, the Fed doesn’t want the public to understand that rampant inflation of the money supply is the real policy of the Federal Reserve. If the citizenry realized how fast the value of their US dollars was falling, they would quickly take actions to get out of US dollar-denominated paper assets such as stocks, bonds, and the dollar itself. Some of these dollars would be used to purchase assets in other currencies and some would be used to acquire tangible assets like real estate, gold, and silver. Such a shift would also bring on a crash of the US economy.
The crash is inevitable. In my judgment, it is just a matter of when it will happen.
So, at this week’s meeting, the job of the FOMC will be to hide the fact that the Fed is never going to reduce its rate of inflation of the money supply. It’s going to try to hide this information from the public by pretending that the current level of US Treasury debt purchases are just a temporary measure. Once again, it will vaguely hint that at some point in the future, the Fed may decide to reduce the buying of Treasury debt. The FOMC will try to walk a fine line between continuing its huge inflation of the money supply while appearing that it may be possible to reduce the scale of inflation at some point in the future.
Whatever the mainstream media reports on the Federal Open Market Committee announcement this week, you will be far better off taking actions to protect your wealth by focusing on what the FOMC is trying to hide. What they are trying to keep the public from knowing is that paper assets such as stocks, bonds, and currencies carry a significant risk of loss while hard assets such as gold and silver will preserve their value just like they have for thousands of years.
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (under “News & Articles) . His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com