It's Inflation, You Clowns

Promoting a horse to the US Senate might improve the place as investors flee into Gold...

CAN ANYONE take the Federal Reserve seriously anymore? asks Dan Denning for The Daily Reckoning in Melbourne, Australia.

   The Fed left short term US rates at 2.0% in June, even though interest rates are way below the rate of inflation and are – in real terms – therefore negative.

   Not exactly hawkish for the US Dollar. But good for Gold, commodities and commodity-linked currencies.

   Does the hubris of a central banker know any bounds? The Fed had the audacity, in its accompanying statement, to puff out its chest and talk all tough about inflation!

   "Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased."

   That's right, you clowns. Inflation expectations are higher because you stepped in and bailed out Bear Stearns while cutting US interest rates 325 basis points.

   And you act surprised that it set off a wildfire in commodities?

   "The thrust of Bernanke's explanation was this," writes our colleague here at the Old Hat Factory, Al Robinson. "America faces two threats: inflation and deflation. Inflation is, in the mind of America's top economists, the bigger threat right now. But it still isn't enough of a threat. Interest rates in the land of the free remain shackled at 2%.

   "To release them, either the US housing market and consumer confidence have to improve dramatically...or consumer inflation has to decrease dramatically. Before that happens, the base rate will stay where it is."

   But that won't help inflation ease, as Al notes. So "Americans have the choice of spending money or saving it. If they save it, they get 2% minus inflation. Headline inflation is over 4% in America. Two minus four does not equal profits. It equals losses.

   "So the only alternative is to spend money on something today. But on what? Let's see now, what have we got here...Paying off mortgage principle, putting money into safe-haven investments...Wait! Stop. Number Two, come with us. Everyone else, thank you for your time. The position has been filled."

   But speaking of morons, what about the US Congress? Investors notice that the Fed is torching the currency. And so – not wanting to see their savings inflated away to zero – they race for assets which protect their wealth and purchasing power, namely commodities.

   What does Congress do? It wants to make it illegal for pension funds to invest in commodity indexes!

   Are these people really serious? Are they asinine or just equine? How degenerate has the American political establishment become? The Roman historian Suetonius reports that the Emperor Caligula made his prized horse Incitatus a first citizen of Rome and later a Senator. The story – we don't know whether it's true or not – is often used a cautionary tale for how debauched and dysfunctional Rome had become as an Empire.

   But frankly, we think a few horses in the US Senate today might improve the place. You have to think horses would be natural small government conservatives. They say "neigh" all the time. (Boom, boom!)

   "Depending on who you ask," Al goes on, "America's GDP last year was between $13 and $14 trillion. That's around a quarter of the world's output. And all that income has to go somewhere – and go somewhere fast – now that inflation is laying waste to cash and savings accounts.

   "The US housing market is a dog. The Dow Jones is flapping up and down like a wet towel pegged to the Hills Hoist out back. That doesn't leave many investments for Americans to consider. Gold is one of them. We reckon it's cheap at $900 per ounce. Today it's trading at $888. And Australian companies are officially the best in the world at finding it!"

   Yes, according to the latest US Geological Survey, Australia dug more gold than anyone last year. Take that South Africa! The champ is down! The champ is down!

   And with Aussie production outstripping the world's former No.1 – and still outstripping China's gold mining production, on the USGS numbers at least – Australia's also standing on the world's second-largest proven reverse bank of Gold.

   But here Down Under, what does the Australian Federal government do to encourage new mining and mineral exports? How will it encourage foreign investment in Australian resources?

   Does anyone know the answer? Bueller? Bueller?

   Well this week, the Foreign Investment & Trade Board told Sinosteel – a Chinese steel company, as you might guess – to cool its heels for 90 days while the government figures out how much of Australia it will sell to foreign investors.

   Sinosteel already owns 43.6% of Aussie iron ore junior Mid West, and was given permission earlier this year to buy all of the company. But Sinosteel also owns about 2.4% of Murchison Metals, and it Sinosteel applied to buy all of Murchison as well.

   It wasn't rejected. But an official-looking note from the Treasury, published yesterday in something called the Government Gazette, says the government's told Sinosteel to go away for 90 days while it figures out what to do.

   But you can't have the benefits of foreign capital without giving up some ownership. And the whole development of the Mid-West region of Western Australia will depend on foreign capital and joint venture partnerships. Getting all that Gold out of the ground, for instance, ready to help US and other inflation-stricken investors defend their savings, will take capital investment – lots of it.

   "Estimated uses" for the United States' own production of gold in 2007, says the latest US Geological Survey, "were jewelry and arts, 84%; electrical and electronics, 6%; dental and other, 10%."

   That "other", we guess, includes Gold Investment alongside dental fillings. So somebody needs to start shipping a heap of Gold over to help US citizens escape the Fed's tomfoolery – and quick.