For the Fed, Inflation is a Positive

The Federal Reserve is down on its luck. It struck out with near-zero interest rates, gargantuan monetary policy measures, and particularly quantitative easing programs – which all have failed to fire. Now the public is wondering why the Reserve did anything at all. The state of the nation, it seems, is just as poor as it was some many months ago.

Bernanke’s Poker Face

Ben Bernanke knows, as a Keynesian, that his goal is to “boost aggregate demand.” Simply put, his job is to make sure people want to buy more things today than they wanted to buy yesterday. To accomplish this goal, he has to convince people to spend their money now – either by giving them more money or persuading them to part with their cash.

However, as we should already be well aware, giving people and banks more money or capital has not at all increased the rate at which consumers are demanding from the marketplace.

His Next Move

Since neither quantitative easing or near negative interest rates were effective, Bernanke has one more tool up his sleeve before negative interest rates. He has to make the market believe that their money will be worth less tomorrow than it is today in order to convince people to spend, lend, or invest. All three actions are positives for economic indicators, and they would provide the markets with a minimum of a false sense of security.

The good news is that talk is cheap, but it will need to be backed up with some tough love – which is at least a round or two of quantitative easing.

Pulling out the Stops

Bernanke, long seen as the perennial cheerleader for inflation, is the first person you’d want on deck at the Federal Reserve when it is clear the next step is inflation. The talking heads on the economic right and left have already cleared the idea of quantitative easing through the mainstream, and for Bernanke, the action combines the best of both worlds: inflation and more cash to boost aggregate demand.

Market actors will have to decide between using their cash now to avoid devaluation, and to some degree, they’ll have more cash in the future than they do right now.

Get Ready, Metals Investors

Nothing is more bullish for metals than fear or inflation. In the past two years, we have seen gold and silver soar with fear and add even more to their high prices when inflation comes into the mix. With the Fed’s last chance to change the market deeply invested on inflation, metals investors can be sure the potential for profit is there.

Beyond profit, however, is the once in a lifetime chance to secure your assets before inflation arrives. Not all investments are market resistant – just like not all homes are weather resistant – and while it may seem convenient to avoid the safest home 99% of the time, when the storm comes, you’ll be glad you bought some protection. At these prices, protection is cheap, and inaction is expensive.

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Tags: Ben Bernanke, Federal Reserve, Gold and Silver, inflation, inflationfears, Keynesian, metals investors, quantitative easing programs