The Fed’s Inflation Play

Posted at 7:43 AM (CST) by & filed under

By Greg Hunter’s

Dear CIGAs,

I have been saying repeatedly that the one thing you can count on is inflation.  If you take housing out of the picture, that is exactly what we have been getting.  The Fed wants inflation and loathes deflation.  Ben Bernanke and other Fed officials have consistently said they want to support “asset prices.” In an October statement from the Federal Reserve Bank of New York, it attempted to explain its bloated balance sheet and explain why it was buying government bonds and mortgage-backed securities.  The Fed said in part, “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” (Click here to read the entire Fed statement from October 2010.)

According to financial expert James Rickards, the Federal Reserve is playing an inflation game called “financial repression.”  The goal is to get the U.S. out from under at least $77 trillion in debt and future liabilities.  The Fed would like to cut the deficit in half in 10 years.  How do you do that without actually cutting anything?  Rickards said in a recent interview on King World News, “The answer is 4% inflation.  It doesn’t have to be that high, it just has to be persistent.  It’s like holding an ice cube in your hand.  It just melts away.  Well that’s what the Fed is doing, and that’s what financial repression is all about.” (Click here for the complete King World News interview with Mr. Rickards.) (Click here for James Rickards’ bio.)

In simple terms, in order for this to work, the Fed needs both inflation and growth.  This has been implemented in the past, and a great example is the post WWII economy.  There was growth because the U.S. was helping to rebuild the world after the carnage in Europe and the South Pacific. There was also some inflation, but not so much that would alarm the public because back then, everyone had a job and wages rose.  By the 60’s, the debt overhang from the war was largely in check.