And so, according to Ben Bernanke, and much of the main stream media, we should have cause to celebrate. Yet just 5 years ago, there was a stock market that also rallied - it outperformed every other stock market in the world. Here it is:
Pretty Impressive huh? But is that how we should judge an economy? Purely on the performance of the Stock Market? During that historic stock market rise in Zimbabwe, this is how people lived their everyday lives:
A multi million Zim Dollar Dinner:
But what if you didn't have a job to pay for things? After all, whatever money you had in your mattress became worthless as the value of a 10 Zim Dollar bill equaled the value of a million dollar bill, later to be replaced by the billion dollar bill, etc... So what did you do? You panned for gold:
I want to be clear: it is highly unlikely that the US will experience that kind of hyperinflation. Peter Schiff and others have been right about many things, but on this, he is wrong. I have written about this in my post: Don't Discount the US or the Dollar Just Yet. In that post I said that the US still has the largest gold reserves in the world, and also hosts what is called "custodial gold." Custodial gold is gold held under the NY Branch of the Federal Reserve and is gold that belongs to other countries. And so the US has access to more than enough gold should there be a severe currency crisis, a war, etc... I would call it the biggest Insurance Policy in the world. Next to nuclear weapons, gold is the only other type of Insurance that a Superpower can have.
You see, when the US went off the gold standard in 1971, it still held onto its gold. Frequently, it encouraged other countries to sell theirs. And why not? As a superpower, you need to maintain a competitive edge over everybody else. For example, in England, the Chancellor of the Exchequer, then Gordon Brown, sold off much of England's gold at the worst time.
China knows this. So does Russia. That's why they are scrambling to buy any and all gold they can find - in discreet ways, so as not to cause a severe price shock in the gold market. But deep down, they all know that eventually, as the interest payments on debts worldwide skyrocket, that ultimately the fiat paper system will collapse. There is no way the West will be able to grow out of this. Japan and the US may be able to print away while Europe self imposes austerity, but eventually, the lopsided trade arrangements and lopsided accumulations of debts and surpluses will all even out. And if such imbalances can't be evened out smoothly, they will even out in a collapse.
But back to Bernanke. Bernanke will be known as the fool that destroyed the fiat paper system. He may already know this - that he may one day become a scapegoat. Recently he criticized Congress for running a fiscal deficit larger than QE2. What was that about? Bernanke knows that we live in a fiat money world, and that debts do not finance many national governments the way most people think. The US Government, you see, prints (electronically) money whenever it buys stuff. The US Bond market only exists to manipulate interest rates and to pay trading partners that hold a surplus a return on their dollars - and so they want more dollars. But eventually, the currency will suffer. And Bernanke wants Congress to get that blame, or at least share in that blame when it happens.
So is the Stock Market's rise an indication of good times ahead? Not really. Just look at Zimbabwe. It is the result of QE, not organic, sustainable growth. Bernanke wants the stock market to rise, and so he pushes down interest rates by buying Treasuries and prints money. In that process, savers, such as grandmothers that want to live off the interest on their savings, are being robbed. The interest rate on Grandma's savings account is being artificially suppressed by Bernanke. The stolen wealth from grandma is then funneled to Wall Street banks that use computerized programs to speculate in the stock markets. It's theft by clandestine means. But the market rallies, and the gullible people celebrate that all's well... for now.
But Ben Bernanke can't keep this interest rate rigging game going on forever. Just look at the interest rates on long term US Government debt. They have been rising since last October. Bernanke wants to keep rates below real inflation. That's how grandma's retirement savings get pilfered. But he can't do this forever. As rates rise, as inflation rises, and unemployment stagnates, Bernanke will be stuck. The only way to push rates down once again will be a catch 22. Additional QE programs to buy bonds will be judged as inflationary - so he fails there. If he tries to get ahead of inflation by raising rates, unemployment will skyrocket as he chokes the economy with higher rates.
So what else can Bernanke do? Blame Congress.
Our fate will not be like Zimbabwe's. We will not have hyperinflation, but we will have severe inflation before the currency crisis hits. The biggest domestic danger the US faces is the collapse of the FIRE (Finance, Insurance, and Real Estate) economy. When rates rise, the values of real assets can drop, as the monthly payments on the loans used to purchase those assets skyrocket along with rates. Our economy has been artificially managed to rely on asset value growth and consumption. Inflation will limit consumption, and higher rates will trigger more loan defaults and increase debt payments.
So I have some bad news for you. At the end of the day, there is no solution to a fiat paper driven credit bubble that also created massive global trade and debt imbalances. The system does not slowly morph into something else. The system will eventually reach a critical state, and collapse. And that's when gold kicks in to arrest a Zimbabwe-like hyperinflation. I can see the dollar, once again, becoming backed by gold before hyperinflation could set in. And at a very high value at that.