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Schiff Responds to Dudley, Fed

Our weekly commentaries provide Euro Pacific Capital's latest thinking on developments in the global marketplace. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital.
Peter Schiff
Friday, October 1, 2010

NY Fed President William Dudley's outrageous statements today closely conform to recent pronouncements from other Fed officials and confirm that a massive round of dollar devaluation is poised to begin.

Seemingly overnight, the Fed appears to have altered its mandate, ditching its former goal of "price stability" in favor of "moderate price inflation." While no one is under the illusion that the Fed has kept prices stable over the last century, it used to be that the governors would at least pretend to fight inflation. Low inflation used to be the aim, now it's the enemy.  

Although the inflation being created by the Fed may not be showing up immediately in rising rents or auto prices, it is nevertheless pushing up asset prices in other areas.  Many commentators are celebrating the "best September for the Dow and S&P in 71 years," rising 7.7% and 8.8% respectively. Well, it was also a pretty great September for soybeans (up 9.5%), rice (up 10%), oil (up 11%), corn (up 12.2%), orange juice (up 13%), cotton (up 17.5%), and sugar (up 19.3%). In fact, the whole CRB is up 8.7%. The Swiss franc is up 4.6%, the euro up 7%, the Aussie dollar up 9%. Gold is at all-time highs, silver at 30-year highs, and copper at 3-year highs.

In other words, the box of Uncle Ben's in my kitchen cabinet had a better month than the Dow Jones Industrials. The same could be said for the boxer shorts in my dresser. Could it be that the Dow isn't rising, but the dollar falling?

Dudley says it may take "several years" before inflation returns to levels consistent with the Fed's mandate. Exactly when did the Fed establish a floor for "acceptable inflation?" Where is that floor, 2%? (The core PCE index is currently up 1.4% for the year) If we are below the floor, where's the ceiling- 3%? 4%? In 1971, President Nixon imposed price controls when inflation averaged 4%. That rate was considered so high that emergency measures were needed. Is that still the case? How much higher do costs have to go for cash-strapped Americans before the Fed can be expected to take its foot off the gas?

Without better understanding of where these parameters lie for the Fed, the markets will be flying blind through an impenetrable fog.

If the Fed were serious about maintaining long-term price stability, which is its actual mandate, it would need to allow prices to fall after the speculative booms that it helped create. As we saw in the 1980s, unemployment resolves itself when the monetary system is sound, but no one will hire under the uncertainty of a rogue, inflationary Federal Reserve. As people on fixed incomes, increasingly impoverished by low yields and rising prices, desperately re-enter the work force, look for unemployment to head higher. 

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