Will the Fed's Rollercoaster Ride Save the Dollar?

Why we Americans ever abdicated our financial freedom to a group of 12 unelected individuals who sit on the Federal Open Market Committee, is beyond me. That being said, we are stuck with a system that allows an unaccountable and unconstitutional institution dictate the appropriate level of interest rates instead of the free market. Our founding fathers made it clear that they wanted money to consist of only gold and silver. They did this so as to guarantee that the money supply had intrinsic value and would be limited in nature. This would also allow bank interest rates to be a function of savings vs. demand, not a matter of decree. Because of the above situation, we have been forced to endure a dizzying ride of interest rate gyrations that have created severe imbalances in our economy.

The market has now priced in the end of the Fed's interest rate slashing campaign that began in the summer of 2007. The prices of most commodities have contracted and the US dollar has staged a minor rebound, anticipating the conclusion of this cycle. The question is, will the downward pressure in commodities continue and should investors expect the end of this interest rate toboggan ride?

To help The following charts show the performance of gold, the CRB index and the Dollar index (DXY) during the period of June 29th 2004 thru September 17th 2007. This is the period of time when the Federal Funds rate began rising from 1-5.25%, and the date when the Fed started this current easing cycle.

Gold:

CRB Index:

US Dollar Index:

We can see from the charts above that despite the Fed's actions, gold and commodities appreciated in price while the US. Dollar continued in its secular bear market. The reason for these counterintuitive movements is that even at 5.25%, the Fed was still very accommodative in its monetary stance.

Assuming the Fed cuts again today, this recent round of rate cuts will have taken us all the way back to 2%, which is a historically low and highly inflationary level. Fed officials would have us believe that they can take rates higher soon to combat the inflation already present in the economy, but how can anyone take them seriously when the consumer and the economy have become even more leveraged since the Fed caved into saving the housing and stock markets just last summer? Can we really have any confidence in an institution that took rates from 1% to 5.25%, then back to 2% and now wants to move back up again, all in the space of a few years? This is the type of roller coaster action you get when you let a small group of individuals decide the cost of money instead of the market.

Surely, the fate of commodities can be expected to be heavily influenced by the direction of the U.S. dollar. Despite any counter-rally, however, the secular bear market in the dollar should continue because all the factors that lead to a falling currency remain in place--trenchant interest rate differentials, a $700 billion a year trade deficit, a record $9.44 trillion dollar fiscal deficit and a comparatively weak GDP growth rate. Given our recent history and the current state of the economy, gold and commodities should have little to fear.

Michael Pento is a Senior Market Strategist with Delta Global Advisors and a contributor to Green Faucet.

Comments

[joebhed]

"Why we Americans ever abdicated our financial freedom to a group of 12 unelected individuals who sit on the Federal Open Market Committee, is beyond me."
Me, too.
But, which "we" are you talking about?
I mean, "We, the people...".
I'm a little concerned after reading the full post that your "we" is, we, the invisible hand.
The Adam Smith we.
The market.

On the FED.
Yes, they're unelected power brokers
But your complaint doesn't seem to be that they are private bankers, unaccountable to any “we", setting the monetary policy of the country in a devastating, almost criminal, manner.
Your complaint seems to be that they are left with a smidgeon of regulatory power that gets in the way of the international monied interests.
I see the message of "let the market decide".

From my 'we".
We are a sovereign country, and our people have the right to establish a monetary system to our own liking.
My liking is a sovereign Central Bank of the US.
My liking is a publicly-controlled money system, modeled a great deal on the Cutting-Patman Bill from 1934.
The government of the people gets to create all of the nation's money, and the bankers get to play with it after it is deposited ,on a 100-percent-reserve basis.
An honest money system.
But I do agree that it was a huge mistake to abdicate the rights we could have under that system to a bunch of private-interest bankers.

[dadw5boys]

First of all FORGET GOLD!
Gold's only real value is when used for a product in bar form it is taken from the ground then placed back in the gound with guards around it. That is silly.

Place value on real tangable items like the infustructure of the USA. See maintanence of that ass value added. How much is the Hoover Dam worth?

If the Federal Reserve places value on an Investment bank enough to bail then out to the tune of $ 4 TRILLION DOLLARS then WHY DON'T THEY VALUE THE AMERICAN WORKERS and give Social Security $ 4 TRILLION DOLLARS????????

ARE THE AMERICAN PEOPLE NOT VALUED AS MUCH AS SOME INVESTMENT BANK AND IT'S OWNERS??????

[WIpatriot]

dad, sometimes you make a point and sometimes you ramble. This post is the latter. I really don't think you want to start a precious metals and commodities debate, do you?

[joebhed]

Let's .

[dadw5boys]

The only way to get rid of the federal reserve is to put value in our country's infustruct­ure!!!!!!!

[ErnestineBass]

In a word...nope.

[Henry]

There was this Englishman who took vacation to Taihiti in 1936. While there he paid for everything with checks drawn on his bank in England. He goes back to England, waits for the checks he had written to clear his bank account. However the checks are never "presented" to his bank for payment. He spends all the money on investments in England.
In 1966 he retires and takes a vacation to Taihiti. This time he has AmExpress travelers checks. He dines out one night, pays with a travelers check and his change has amongst it a Check stamped "Payable to Bearer" that he had written some 30 years earlier!
The question: Who paid for his vacation in 1936? The one that had checks never "presented" for payment.
This is, of course, the USA. We've been traveling for free for quite awhile. The bill will be presented in a crash or over a prolonged period of time. But all our checks will come home for payment and our account will have to bear the brunt. So... the Fed, will the Fed save the dollar? What do you think? Remember the Lira?

[jttalker]

These bums at the Fed don't know what they're doing...they just create inflation endlessly. People forget: in the late 1800's, Democrats were the party of sound money because they recognized the loss of purchasing power through inflation harmed the little guy most... rich guys don't care about a 20% rise in the price of milk, but to a single, working mother it's huge. Why don't Democrats make a sound currency part of our pitch to America?

[profmsf]

Great point. If you want to see the real inflation rate, check out www.shadowstats.com. If we were still using the methodology used before 1993, (who became President then???), the rate would be 11%. The sleight-of-hand is called "hedonic pricing". It basically says that if your new gadget does more than your old gadget but costs the same, then the old gadget has actually fallen in price retroactively so we can lower inflation estimates by keeping the old gadget in the index as its price falls. Completely bogus logic. Since food and energy are not gadgets, we conveniently exclude them from "core inflation". Voila - no inflation! Except it's actually about 11%. Why people are not marching down Broadway with pitchforks yet amazes me. We have fleeced them out of their union jobs, their health insurance, their pensions, many of their homes, and soon, their currency and still they take it. Quick, let me put on my flag pin before I go back to my hedge fund job tomorrow morning.

[dadw5boys]

Call the FEDERAL RESERVE and ask them why they are charging the Americans people " 21.46 % " interest on the National Debt and keep lowering the interest rates to banks to help corporatio­ns????????