With many Americans struggling to pay rent and even put food on the table during the coronavirus pandemic, the Federal Reserve has taken extraordinary action to support the suffering economy. While the Fed’s actions are intended to help strengthen the economy, it is a temporary solution leading to an even bigger problem, the inevitable devaluation of the U.S. dollar. Every American must understand what we are facing as a country and how to prevent the repercussions.
Cutting the federal funds rate, keeping near-zero interest rates, and purchasing securities are just a few of the many actions the Fed has taken to support the economy. They took such drastic measures to maximize the amount of money in the hands of the people, increase consumer spending, and assist in the recovery of the economy. “We are deploying these lending powers to an unprecedented extent [and] … will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” said Jerome H. Powell, chair of the Federal Reserve. These actions have caused the Fed’s balance sheet to top $7 trillion as the national debt is nearing $27 trillion. Who is paying the tab for all these unearned dollars?
The Federal Reserve is running the money printing press at full speed. It continues to inject trillions of dollars, not backed by goods nor services, into the economy. These dollars do not increase wealth; they just create more claims on the wealth that already exists. This inflation process decreases the dollar’s value as more and more of these dollars are created. Prices are already rising for essential goods people need, such as food at home, cleaning products, and medical care. But these price increases are nothing compared to what is to come.
Many believe that when the COVID-19 pandemic is over, the economy will be restored to its past success. Numerous speculators believe that not only there won’t be inflation, but that there will even be deflation. These individuals are following the opinion of the federal reserve. “I’m not worried about inflation. Obviously if there were significant inflationary pressures with inflation taking off, we know how to respond to that. But I don’t see any signs of that,” said New York Fed President John Williams, who is a key adviser to Fed Chairman Jerome Powell. These speculators reason that they believe demand will be weak and unemployment will be high, while the supply chain will recover and offer plenty of goods to serve the demand. However, since September, unemployment has decreased to about 7.9%. This rate is more or less a great measure of how many people are unemployed during a normal time. When the virus is over, even more people will be employed, which will spur more consumer spending along with business reopenings. The majority of these created dollars are currently frozen in the hands of the people as market uncertainty leads to mass savings, and many costly attractions are closed. When the pandemic is over, these dollars will finally be spent on a large scale. These indicators will cause an increase in demand. When this volatility in spending happens, there will be a tremendous amount of inflation, possibly hyperinflation. The government will indirectly take a significant percentage of money from the American people, not by taxing our dollars, but by inflating the dollars we already have. This process is a cunning but efficient way of taking money from individuals who have worked and saved. While the number of our dollars will be the same, their value will be significantly reduced. Therefore, the ones most affected will be those that have the majority of their money in savings. That being said, inflation is a lot more vicious than taxes, as it also hits those most vulnerable, the lower class, working poor, and people who have savings.
Having read thus far, you’re probably asking yourself the obvious question regarding my inflation position. Where was the mass inflation during the Great Recession? Despite the unconventional monetary policy, quantitative easing, we saw little inflation. To understand why this was the case, one must first understand what happened. The state of the economy was already deflationary when quantitative easing began. After QE1, the Fed underwent a second round of quantitative easing and purchased assets from banks in return for dollars. However, the money being injected into the economy by QE was by and large hoarded by the banks and financial institutions to shore up their own balance sheets to regain profitability. Inflation does not directly happen as a result of printing; it occurs from the volatility of spending. As banks hoarded most of the money, spending was not nearly high enough for hyperinflation.
However, during the COVID-19 pandemic, the federal reserve has not focused on allocating money only in the hands of the banks; they also put money directly in the hands of the people. This time around, a money injection went directly to individuals and businesses through the CARES Act, as well as to a vast amount of industries such as airlines and hospitals. Most of these created dollars are now in the hands of the people. The money will be spent, money volatility will occur, and inflation will ultimately be upon us.
If the dollar will lose a significant portion of its value, what can we, as American citizens, do to hedge against this dollar crisis? The solution is to place an adequate percentage of one’s wealth in safe-haven commodities such as gold and silver. These precious metals are limited in quantity based on how much has been mined, and the Fed cannot print more if it pleases. While gold has very little use, it is respected as a universal currency, and every country recognizes its intrinsic value. Gold has been a widely accepted hedge against fiat currency for a very long time. During the 2008 financial crisis, as the U.S. dollar was rising, gold and silver were falling. The reason for this inverse relationship is because of how strong the US dollar was during that time. However, as the monetary response began to unfold (QE1) and trillions of dollars were created in an attempt to backstop the financial system, these precious metals began to rally dramatically. Using annual historical data, one can see that from the beginning of 2008 until the end of 2011, gold and silver prices both went up over 87%. An ounce of gold went from $840.75 to $1,574.50, while an ounce of silver went from $14.93 to $28.18.
Many of the largest investment banks have projected a tremendous increase in the prices of gold and silver. “With more downside expected in US real interest rates, we are once again reiterating our long gold recommendation from March and are raising our 12-month gold and silver price forecasts to $2300/toz and $30/toz respectively from $2000/toz and $22/toz,” analysts at Goldman Sachs said.
While Warren Buffet has historically been disinterested in the yellow metal, saying that it is “neither of much use nor procreative,” Berkshire Hathaway disclosed at the end of the second quarter that it had a $565 million stake in Barrick Gold Corp., the world’s second-largest gold mining company. Possibly the most successful investor of all time has put his name behind a gold-mining company.
It is important to note that this issue is not just an American issue but a global one. Most countries are printing their currency just as America is doing. This indicator makes gold and silver even more bullish. Gold bullion is a great way to store the value of one’s wealth. However, the investors that will enjoy the most considerable profits on these precious metal investments are those that invest in gold mining companies. Of course, while these investments come with the most outstanding returns, they also come with the most significant risk.
Photo Caption: Cash Is Trash
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