GET READY FOR INFLATION AND HIGHER INTEREST RATES

As bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences.

The Fed controls the monetary base 100 percent and does so by purchasing and selling assets in the open market. About eight months ago, the Fed [Bernanke] signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position:

• The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10; it is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless.
• The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95 percent of the monetary base -- has risen by a little less than 10 percent, while bank reserves have increased almost 20-fold.
• Now the currency-in-circulation component of the monetary base is a smidgen less than 50 percent of the monetary base.

It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because we have never seen anything like this in the United States...

READ MORE