I read an interesting article yesterday on Marketwatch, which discussed a summary of the Federal Reserve’s meeting from January 2011.
I’m going to point out a few key takeaways from this article that I found to be significant. It’s easy to believe Federal Reserve officials who swear up and down that our economy is recovering. But if you read between the lines, it becomes apparent that the Fed is trying to placate the American public.
Consider the following excerpts
“A few members noted that additional data pointing to a sufficiently strong recovery could make it appropriate to consider reducing the pace or overall size of the purchase program.”
It’s my belief that this moot point is an attempt to reassure the American people and, more importantly, the markets that things are getting better here in the U.S. The reality is that the Fed has absolutely no intention of discontinuing the purchase of Treasury bonds with Ben Bernanke at the helm – you can bet on that.
A causal increase in prices – too much money chasing too few commodities – creates inflation, which spells out bad news for our perceived economic recovery.
“Some Fed officials are worried that companies will try to pass along higher energy prices to consumers. Producer price data released earlier on Wednesday by the Labor Department show increased costs, even though these largely have not been passed onto consumers. These officials worry companies might try to hike prices ‘substantially’ once they found they could.”
Of course companies are going to increase their prices to preserve their profit margin! In fact, they already are. In response to rising energy costs, airlines, clothing manufactures and grocery stores have already raised retail prices.
“The world has radically changed,” Richard A. Noll, CEO of Hanesbrands, told WST. “There is a clear understanding that prices need to go up in this kind of environment” – (Hanesbrands plans to raise prices by as much as 10%).
Another way companies are passing along the buck is by reducing portion sizes. According to Consumer Report, manufactures that are downsizing packaging due to increased cost of materials, ingredients, and production (e.g. energy) include:
- Ivory dish detergent (-20%) * Tropicana orange juice (-7.8%)
- Kraft American cheese (-8.3%) * Kirkland paper towels (-11.6%)
- Haagen-Dazs ice cream (-12.5%) * Scott toilet tissue (-9%)
- Lanacane first aid spray (-12.4%) * Chicken of the Sea salmon (-13.3%)
- Classico pesto (-19%) *Hebrew National franks (-8.3%)
This is the only way businesses can continue to sell products at the same prices without shocking the customer at the register.
“Most FOMC members said the high unemployment rate would remain a force restraining inflation.”
How is inflation considered “restrained” when the Feds are pumping billions of fiat currency into the economy? Easy answer – when the Fed calculates the national inflation rate, they do not take into account two major economic components: energy (gas, fuel, etc) and commodities (corn, silver, etc), both of which are on the rise in terms of cost.
So if gas goes up 30% because it takes more U.S. dollars to import, that’s not taken into consideration when calculating inflation – even when the price has clearly been passed onto the consumer.
Savers are losers – dollars are dropping in value. The more money that gets printed, the less your money is worth. If bank interest rates (usually 0.02% interest) don’t even keep up with the “official” inflation rate at 2-3%, how much more wealth are you losing due to the actual rate of inflation (which takes into account energy and commodities prices)?
Reserves – Keep a 6-month reserve of emergency funds and that’s it. I would put the rest of your savings either in a fixed rate loan (less than 6%) or consider investing in the precious metals (physical metals, not paper notes, i.e. ETFs) – be more bullish on silver than on gold (equal to or greater than 50:50 ratio). See my interview with goldsilver.com for more insight.
Gardening?? – I know this sounds absurd, but consider growing a small garden and planting a few fruit trees. Rising food prices are here to stay, so happy farming!