Barack Obama's nomination of Fed governor Janet Yellen to be the next central bank chieftain is nothing but extraordinary when we consider how closely Mrs. Yellen has been to the policies of the current Fed ruler, Ben Bernanke. Those policies have over the long-term weakened the U.S. economy, have served to bailout a dysfunctional and corrupt politically engineered economic system and the entire world now are QE junkies who can’t stop for fear of global collapse. What Yellen's nomination represents is an endorsement of last five years, which have generated below average economic growth and made countless Americans unemployed.
In this Monday, June 3, 2013, file photo, Janet Yellen, vice chair of the Board of Governors of the Federal Reserve System, answers a question from a participant at the International Monetary Conference in Shanghai, China. (Credit: AP)
Yellen's policies will not destroy what is really holding back the U.S. economy: Cartels in the service sector (services are our biggest economic sector -- the government says it constitutes 80% of our GDP).
From lawyers to doctors to engineers to crane operators to stock brokers to nurses to ship crewmen to garbage men to accountants -- the truly explosive growth of cartels in America in the last 50 years has structurally created higher prices for a host of services in the U.S. economy, and held millions of Americans back from good jobs. It has also dented quality enormously and denied free market capitalism.
These artificially high prices -- shamelessly choking supply to needless raise cost -- inflict real damage to America's economic superstructure. And Yellen's money-printing is going to do nothing to alleviate that. Her only hope can be if the cartels are forcibly disbanded (not a chance), or if people within the cartelized professions let their salaries fall or stagnant as she tries to raise the inflation rate (not a chance there either).
Analysts from major stock research firms are telling clients that gold should do well under a Yellen-run Federal Reserve, but what should do even better is the inflation rate. The incoming chairwoman is committed to getting more people employed, and she thinks higher inflation is the solution. While her jobs-for-all goal is admirable, raising inflation to increase employment confuses what a central bank can do.
The Federal Reserve cannot create jobs, but it can facilitate the flow of dollars in the economy (if the dollars actually make it to the real economy is for another article). If dollars aren't flowing, it can print them, and at times that can help, but it's not a panacea and won't help at all when there is not a financial crisis occurring.
There is no immediate financial crisis occurring at present in the U.S. banking system. Printing dollars at this stage will do nothing but cause higher inflation and is fueling the next bubble.
As long as the Federal Reserve persists in believing it can affect the job market significantly, it will print money like no tomorrow. This should ultimately be good for the price of gold, and for those owning a house. Renters are likely to see skyrocketing prices, and food and gasoline are going to continue their inch up in price. People on fixed incomes or those who decided not to participate in the stock market -- and instead keep their money in a deposit account -- are going to feel the squeeze.
It should also mean that the dollar is set to get weaker and weaker against other currencies (obviously subject to other central banks recklessness). The Europeans are presently adhering to one of the toughest monetary regimes in the world. From the estimates I have seen, Europe is the hard money capital of the world. The Euro will likely remain above the dollar for the foreseeable future due to Yellen's easy money philosophy.
And this is to say nothing over how her policies will continue the funneling of our dollars to China. Because while all of this is going on, China is strengthening her currency too. She is absorbing dollars (and gold, oil, coal and other commodities). Indeed, in October her holdings of dollars rose to a record of $3.66 trillion, according to the Wall Street Journal. Holding that many dollars in reserve gives China ever-increasing control over the global economy. She can basically buy Germany's economy ($3.4 trillion) and still have $266 billion left over for pocket change!
Yellen's policies, at some point, will also inflict terrible damage on interest rates. Her government bond buying program will wreck what remains of an 'honest' or true interest rate on a U.S. government bond with a plethora of negative consequences like fewer loans to small businesses (the real engine of this U.S. economy).
So houses, commodities, and other currencies are likely to do well. China will get stronger. Cartelized professions are going to come under attack if they raise prices, but won't be disbanded. Unfortunately, the current dysfunction in the political system will continue. And there will volatile and manipulated interest rates across-the-board. The Yellen World is going to be rough and bumpy; I hope you have your “golden” parachute.
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