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Ben Plans, Commodities Soar

Written By Brian Hicks

Posted November 7, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

Don’t look now, but the Fed has just driven the magic bus right off of the cliff.

Nowhere to run, nowhere to hide, it’s break on through to the other side.

With nearly $1 trillion in new money now set to roll off the printing presses, the Fed has finalized its course. Inflation is the destination.

It does so with a giant magical checkbook that creates money out of nothing. And as we know, since the 70s, it is one that is no longer tied to gold.

It’s what the gold bugs mean when they denounce the dollar as being nothing more than “fiat money.” That is, it’s backed up only by the “full faith and credit of the U.S. Government.”

That’s why commodity prices have been going nuts as of late, as investors place their bets against all of Big Ben’s phony new greenbacks.

For instance, did you know that copper has surged 28% on stronger demand and a weaker U.S. dollar? Or that cotton and gold traded recently at all-time highs for the same reasons?

They have — and along with everything else, including oil, commodities are likely headed much higher from here…

In fact the dollar’s weakness, inflationary pressures, and stronger emerging-market demand, all mean that commodities are going to be very bullish over the next 12 to 18 months.

Inflation at your door

What’s not going to be so bullish is the money in your wallet. Not once the Fed’s grand design for higher prices takes hold…

That’s where the black art of central planning will meet the cleat of reality. You see, you can lead a horse to water, but you can’t make him drink.

We don’t have a supply problem. Cheap money is everywhere you look. What we have is a demand problem: Banks won’t lend and people won’t borrow. As a result, the currency has no velocity — none, nada, zilch.

What do I mean by velocity? It’s a fancy concept used to describe what the rest of us already know. An economy — especially ours — functions best when people spend money instead of saving it or using it to pay down debts.

The velocity of money is simply the average frequency with which a unit of money is spent in a specific period of time.

For instance, if I spend $700 on a new set of tires, that gives the tire shop owner money that he may spend on something else, causing those funds to flow back into the economy in the transactions that follow it.

And as long as those funds continue to be spent, my $700 will work to boost the overall economy through the multiplier effect. As a result, the higher the velocity of money, the stronger the economy becomes as the same fixed unit of money freely flows throughout the system.

That’s where the ultimate sticking point is for the Fed — especially in an economy where consumption is 70% of GDP.

Because while the Fed can force money into the system in exchange for government bonds, they can’t necessarily make the money circulate to create new goods or more importantly, new jobs.

In short, that leaves the Fed simply “pushing on a string.”

And needless to say, rising prices for consumer goods will only make the problem worse… Unless wages somehow manage to rise right along with them.

And don’t hold your breath on that one, because those bigger paychecks aren’t happening.

This all leaves us with a bad combination that simply will not work, regardless of how much money the Fed pushes into the system.

The bus takes flight

Even still, don’t think for a moment that will stop Ben Bernanke and Co. To them, printing money is as natural as breathing.

The reasons for this are twofold: One is that central bankers like Bernanke believe they can somehow “manage” the economy through the manipulation of interest rates and the money supply. The second is that the government printing press is necessary to monetize the escalating federal debt that politicians not only hunger for, but thrive on.

It’s a combination of hubris, greed, and blind ambition that probably won’t end well. Of course, few Americans actually get the picture yet. But how could they?

After all, our modern nation has never suffered from inflation so severe that it destroyed the dollar. That’s something that happens in other countries…

Meanwhile, Ben Bernanke is by all accounts the second most powerful person in the country, and the vast majority of Americans could not begin to tell you a single thing about what the Federal Reserve actually does. Why is that?

Instead, we believe these bankers and politicians when they slap a happy face on everything while promising us a recovery. After all, we have lived our whole lives at the top of the world heap. How could tomorrow be any different?

The truth is that it could be very different. The rapid expansion of the money supply ensures it, because when we devalue the currency, the end result is always inflation.

That’s why the soaring prices of gold and oil are not just some anomaly. It’s a worldwide vote of no confidence against the Fed and its dollars. That was the case in 70s, and it is the same case today.

So as long as the world is restless over our increasing money supply, our trade deficits, our unfunded liabilities, and the complete inability of Congress to rein in government spending… the price of gold, oil, and other commodities will continue to rise as the dollar takes it on the chin.

The Fed isn’t going stop. At this rate, QE3 won’t be far behind.

Arms that chain, eyes that lie, break on through to the other side, oww!

As for some places to invest your money as the next bubble forms, here are a few of the best investment ideas from the pages of this week’s top-read Wealth Daily and Energy & Capital articles.

Have a great weekend.

Your bargain-hunting analyst,

steve sig

Steve Christ
Editor, Wealth Daily

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