The Fed’s Inflation Play

By Greg Hunter’s

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.

Rickards says the big problem now is we are not getting the growth or the inflation that is necessary to make the Feds financial repression scheme work.  I know what some of you are saying right now, “What do you mean there is no inflation?  What about food and energy?”  I thought the same thing, and I emailed Mr. Rickards to explain what he meant.  Here’s Mr. Rickards’ reply: “I understand the price increases in food and energy, however, I used the Fed’s preferred definitions of inflation (core CPI, CPI and the PCE price deflators) all of which are tame. I did this because financial repression is a Fed policy so if you want to understand it through their eyes, you need to use their definitions for analytic purposes. The fact is TIPS spreads to nominal yields are collapsing and inflationary expectations are coming down.  So, regardless of what you and I think of QE, the Fed is not seeing anything that would cause it to back off.” In the Fed’s eye, we are not really getting inflation.  So, as Rickards says, the Fed is not going to “back off.”

Remember, housing prices are off 4% in the first quarter alone, but that is not the figure used in the consumer price index (CPI).  It uses rental equivalents, not actual home prices.  Rickards told me if home prices were used instead of rents, the CPI would probably show “deflation.” The Fed is terrified of that and wants home prices to go up, not down.  This will keep the trillions of dollars of mortgage-backed securities from becoming worth less than they already are.  So, it looks like the Fed will continue suppressing mortgage interest rates and keep holding them artificially down to around 5%.  The Fed wants higher housing prices, but what it is getting are higher food and energy prices.  This is a huge problem for the Fed’s financial repression plan because the public cannot become alarmed and outraged over inflation.

Rickards gave five reasons why, this time around, financial repression will not work in the long term:  1) There is no growth.  2) There is not enough inflation (according to the Fed.)  3) The debt, this time, is “huge.” After WWII, there was 100% debt to GDP ratio.  Rickards says, “Today the Debt to GDP is six to seven hundred percent.” According to a recent Chicago Sun-Times article, the official national debt and liabilities such as Medicare and Medicaid,“. . . now stands at over $77 trillion — and counting!”  (Click here to read the complete Sun-Times post.) This figure does not include other government liabilities such as Fannie, Freddie, FHA and FDIC.  By the way, last weekend, the FDIC closed the 45th bank of the year.  I see no end in sight.  4) Hostile creditors, such as China, are no longer keen on buying U.S. debt. reported last week, “China has dropped 97 percent of its holdings in U.S. Treasury bills, decreasing its ownership of the short-term U.S. government securities from a peak of $210.4 billion in May 2009 to $5.69 billion in March 2011, the most recent month reported by the U.S. Treasury.” (Click here for the complete story.) 5) Rickards says, “Financial repression only works if people cannot own gold.” Today, people can and are buying the yellow metal.  Rickards sees gold, silver and other tangible assets as a way to preserve wealth as opposed to more traditional assets such as cash and Treasury bonds. Rickards sees a pattern of “higher highs and higher lows” in the gold market for some time to come.  He thinks financial repression will work in the short term, but in the longer term, it will fail.  He says the Fed can “keep a lid on it” until 2013.  After that, he says, “there could be some kind of crack-up” in the economy.


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  1. josh

    i think this is a very astute analysis. i find the comparison to wwii to be very interesting. i’ve been thinking for months that we’ve been in this mess before – the deficit spending for the second world war and we got out of it with the boom of the fifties – how did we fix the problem then. i’m shocked to here that we are more in the hole now than we were then. and for what? to prevent a severe ecoonomic meltdown in 2008 that would have destroyed wall st. and reset the income distribution in the economy to a more level playing field.

    • Greg

      Thank you Josh for weighing in on this one.

  2. Hoppe

    Mr. Rikards is an academic, lawyer, investment banker whose bio contains so many instances of “involved in”, it is funny. According to his bio he was a “participant in the stock market crash of 87”.

    Two glaring problems here; He has bought into Bernanke’s “public” evaluation of the problem, citing his belief there is no “core” inflation. That is patently wrong. He should try to buy building supplies, or a set of tires for a car.

    Bernanke has know there is inflation and is just holding his breath hoping something will turn up, because he is out of answers.

    The Tips spreads are collapsing because of QE, failing auctions, and banks hording cash. It and little to do with real inflation, which yes does and must include food and energy. It is a rigged game among big banks and big investment houses and now the game isn’t working so well anymore.

    All of the supposed Fed assumptions might have been proven true in the America of 1970, where we were the undisputed world leader in manufacturing, and banking. In those days the Fed could greatly affect foreign credit policies and purchases. Because we have outsourced virtually everything except the war machine, those days are gone, and the Fed’s old bag of tricks just won’t work.

    I agree that this so called “financial repression” is not going to work,(if that is the fed plan) but for different reasons. Inflation is here and will continue. Consumer spending is going to continue to decline in “real terms”, so the American consumer engine is running on watered down gas, and too lean a mixture.

    The inflation is originating externally.

    Americans need to be prepared for an Eastern Block type of economy.

    • Greg

      Please read Mr. Rickards email response to me in the post. He clearly says it is the Fed that thinks there is little inflation not him. However, I agree with you on this statement “Americans need to be prepared for an Eastern Block type of economy.” And you are correct that we do have inflation in all the areas you mentioned. Thank you for your passion and analysis.

      • Hoppe

        If you read Rickard’s “five reasons” his number 2 says there is not enough inflation- so apparently he believes it.

        • Greg

          Not enough inflation according to the Fed. There is not inflation in housing, just the opposite. Prices declined more than 4% in the first quarter of 2011. That is precisely where the Fed wants inflation but it going backwards despite artificially low mortgage rates. Remember, if you computed CPI using home prices instead of rent equivalents there would be overall deflation. I do get your point though, and thank you for making it here.

          • Art Barnes

            Most americans without a job or are underemployed know how real this inflation thing is and are allready experiencing an eastern block type economy. A vast amount of Americans don’t need to wait to experience it, they are in the middle of it as we speak; 25 million on unemployment insurance, 43 million on food stamps, vast millions on social security only, etc. The fully employed bureaucrats are one class who are not presently experiencing it but little by little they will as the government (counties, states, & cities) downsize police, firefighters, teachers, etc. due to stagnant tax revenues which have supported their oversized appetite to the trough up to now.

  3. Art Barnes

    Kicking the can down the road is all they are doing, the Fed and the elite invester class are intelligent people, they know the economy cannot be sustained in the long run with so much debt, but that is the only play they have. Stagflation is what we have now, inflation with low or not growth.

    My mother used to complain about inflation in the 60’s which the article touched upon, but my father’s income was rising as well; which is not what we see today. The Fed has no more little tricks left, stimulas didn’t work, employment has tanked, it cannot do anything but another round of “quantative easing” in one form or another, that’s it, period. Quantative easing is just “kicking” the can down the road somewhat like a death roll pardon or stay of execution until another hearing on the matter, its going to happen no matter what, its just a matter of time. The “Government” on the otherhand has one trick the Fed doesn’t have, war capabilities and, lets be honest here, war is where we are heading. When the American people finally admit and realize the “dream” has run its course and the government & main street media cannot bullshit them any longer about recovery around the corner, war will commence only making matters worse, but that’s the only trick our government has and it will use it. Hold on America, its going to get tricky! Thank you Gred for this blog to get the message out to our people.

    • Greg

      Thank you Art for your comments and support.

  4. rrr

    When I read an article about the Federal Reserve -valuable information, thanks- it often seems to me that the writer thinks the FED is a kind and generous entity intent on doing what is right. I always have to remind myself that the FED acts in harmony with a group of financial organizations one of whose ultimate effects is to destroy nations. The strategy being used against us has two main components: 1) the ways in which economics can be made to work, and, 2) the public’s ignorance of economics. One other thing I have to keep reminding myself of is the fact that the actions of the Federal Reserve System are not inane, stupid, clumsy, uninformed, or incompetent, but that, actually, they are malicious, intentionally destructive, manipulative, and are engaged in a form of warfare against us. Brazen deceit is flagrantly employed, often without anyone recognizing it. Our people’s ignorant gullibility is heavily relied on. As long as writers continue to believe that the FED is a slightly incompetent but well-intended would-be Santa Claus, there is no hope for any of the nations -or for the populations of those nations- which the central banks are intentionally working to render bankrupt.

    • Hoppe

      Thank you for reminding us of the true nature of the Fed. I think they can be incompetent and malicious at the same time.

      How much we need more leaders like Ron Paul!

      • rrr

        I cannot agree that the owners and chairman of the FED are incompetent in any way. They are very skilled predators, and they achieve their goals consistently and with considerable effectiveness.

      • rrr

        Ron Paul is a nice man and appears knowledgeable. If he runs I may vote for him. But the sort of problem we are up against will not be solved by any one individual, whether leader of a group or acting alone. It is going to take millions of people taking initiative individually, and thus acting together, not because someone is telling them what to do, or is doing for them what needs to be done, but because they themselves, the public, as a whole, recognize thievery when it’s occurring and do what is necessary to make it stop.

      • rrr

        The appearance of incompetence, to which you refer, is in fact a deception.

        • Tom

          Hooray! There’s somebody other than myself who recognizes them as nothing more than a bunch of rotten, lying, manipulative bastards.

          • Art Barnes

            Add one more to your list of people who realize that there is nothing happening now that hasn’t been planned, the elite and or the investor class are smart people, they not a bunch of Mr. Magoos. Their aim to to take power away from the people starting with their money; and, they are doing a great job as we speak.

          • g. johnson

            tom, you left out “murdering”.