In the last few years, the U.S. Treasury has issued more debt than it can ever hope to repay. The Federal Reserve is facilitating these unprecedented Treasury security (debt) sales, while at the same time, hoping to keep interest rates low. This effort, by the Federal Reserve, is being called Quantitative Easing (QE1 or QE2). The Federal Reserve has been coming into the market with hundreds of billions of newly printed dollars and buying Treasury bonds. This is effectively increasing the demand for Treasuries. A greater demand means higher prices for Treasury bonds, and when bond prices go higher, market interest rates tend to go lower. The dollars that the Treasury has been borrowing through these security sales flood into the economy through government spending.
Over the last few years, we have seen an influx of trillions in government spending, chasing a limited supply of goods. This increases demand, drives the prices of those goods higher, which by definition is inflation. This inflation is destroying our savings by significantly reducing the purchasing power of those saved dollars.
Historically, whenever a nation gets itself into the irresponsible level of debt the United States finds itself in today, it resorts to inflation in an effort to monetize its debt. That is, pay off the debt with significantly devalued dollars¬dollars that have much less purchasing power than the dollars that were originally borrowed. This is just what the Treasury and Federal Reserve are attempting to do today.
Regardless of the delusions or deceptions of the Fed, inflation is already destroying the purchasing power of those who hold U.S. dollars. Unfortunately, it is not just gold and oil that are going up. For example, it costs $2.46 now to buy the same amount of cotton one dollar bought last year. Here are some other examples of what one dollar bought a year ago versus the cost now: coffee $1.90, corn $1.87, wheat $1.80, soybeans $1.58, live cattle $1.25, silver $1.58, coal $1.40. There are many others.
It is not the price of food, energy or precious metals that is the problem. The problem is that the purchasing power of the dollar is literally collapsing.
Our elected officials are rearranging the deck chairs on the Titanic and Mr. Ben Bernanke, chairman of the Federal Reserve, is assuring us there is no inflation. Yet, the rest of the world is doing its best to get out of U.S. dollars before they lose additional purchasing power.
The policies followed by our elected representatives have caused a crisis.:American credit is in decline. Credit rating agencies like S&P and Moody, the International Monetary Fund, World Bank, United Nations, China, France, and other central bankers around the world, including even our own congressmen and senators, have been warning us about this. Now, the market is telling us, "Your credit is quickly losing value. We know that you intend to pay back the money we borrowed you with worthless, newly printed dollars."
We are in a monetary crisis. The facts are irrefutable. Yet, the Federal Reserve continues to print new dollars. The Fed recently ignored rising long-term Treasury rates, telling the public it indicated a strengthening economy. They know it indicates falling demand for additional U.S. Treasury debt. Rather than pulling money out of the economy at the first sign of inflation, as the Fed said they would do, they recently recommitted to a $600 billion Treasury bond purchase program they proposed in November 2010.
According to the Fed's minutes: “While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program.”
What is, "sufficient to warrant any adjustments?" According to the United Nations, world food prices hit an all-time record in January 2011 (besting the 2008 levels that sparked deadly riots across the world). According to the Food Price Index from the Food and Agricultural Organization (FAO), food prices are up an average of 50 percent since 2009.
The devastation of the dollar's purchasing power is causing a food crisis and an energy crisis. Riots recently broke out in Egypt, Tunisia and Algeria; this is the beginning of additional unrest over rising food prices in emerging market countries.
Why are there food price riots in emerging market countries but not yet in the United States? In America, food is seven to nine percent of the typical family's budget. However, in emerging markets, food prices can be more than 75 percent of a typical family's budget. Therefore, it is not surprising that food riots break out in these countries when inflation drives prices beyond the consumers' ability to feed their families.
The damage we see to the dollar's purchasing power today was caused by Quantitative Easing One (QE 1) policies. We will not see the full extent of the QE 2 policies for another 9 months or more. It takes at least six to nine months for new money injected into the economy to affect prices. QE 2's program was scheduled to be implemented from November, 2010 through the end of June, 2011. QE3 (or whatever term they use to describe it) is currently baked in the cake, as they say, especially if interest rates rise or Congress does not radically cut spending.
How can those with savings hope to preserve the purchasing power of their money? It is important to develop a new paradigm when it comes to savings. In this type of economic environment, cash, cash equivalents (like money markets, savings accounts, three-month CDs, Treasury bills) and bonds, especially long-term bonds, will lose purchasing power over time. In short, on average, what one dollar bought two years ago costs $1.87 today.
This is likely to be the beginning of a long-term trend that will see higher inflation and interest rates for many years to come. This administration has launched the American economy down a steep precipice.
-Vern Sumnicht, CEO of Sumnicht & Associates, founder and president of iSectors, LLC is an investment advisor with 27 years of experience helping wealthy individuals, foundations, trusts and other institutional clients manage their investment portfolios.
