The Fed Will Stop at Nothing According to New Issue of Money and Markets



Martin D. Weiss, Ph. D. takes a closer look at how far the Federal Reserve will go to avoid failures, even at the risk of inflation. Dr. Weiss compares the condition of the U.S. marketplace to a similar situation that occurred in 1970.

Weiss believes that, like the Federal Reserve of 1970s, today's Federal Reserve is trying to avert a chain reaction of failures. But these failures will inevitably lead to inflation.

* U.S. producer prices have risen by almost 7% over the past year. And right now, they're growing at an annualized pace of 13.2%.

* U.S. import prices have risen 14.8% compared to a year earlier. And in the most recent month alone, they rose at an annualized rate of 33.6%.

* Critical energy and food prices are rising at a pace that makes some of the 1970s surges seem small by comparison. Just in the past 12 months, for example, corn is up 70%, sugar is up 72%, and the all-important price of crude oil is up by an astounding 102%.

Currently, the only measure that does not yet reflect surging inflation is the Consumer Price Index. Until now, the discrepancy between actual inflation and the government's Consumer Price Index (CPI) was largely an academic debate few people paid much attention to.

According to John Williams' Shadow Statistics, the premier source of U.S. economic indicators, while the March year-over-year change in the official CPI was only 3.98%, the true CPI, based on the same standards as those that prevailed before the Clinton administration, is now 11.58%. This means that the gap between the official CPI and the alternate CPI is now 7.6 percentage points. In other words, the U.S. government could now be understating the CPI by a full 7.6%! This gap has widened dramatically over the years. Until January 1982, there was no gap whatsoever and until November 1986, the gap was usually less than 1%.

Even at just 4%, the official CPI inflation has exceeded the Fed's target range. And even at this artificially low level, it is already triggering a gusher of concern. Mike Larson noted a few examples last Thursday in a posting titled, "Officials Ratcheting up Their Inflation-Fighting Rhetoric":

* Kansas City Fed President Thomas Hoenig: We are now facing "inflation psychology to an extent that I have not seen since the 1970s and early 1980s."

* IMF Deputy Chief John Lipsky: "This inflation speed-up must be taken seriously as it creates potentially significant challenges to economic stability." A return to 1970s-style high inflation and rising price expectations "cannot be discarded out of hand."

* ECB president Jean-Claude Trichet: "There's no time for complacency in any respect" as far as inflation expectations are concerned.

The one single measure Weiss believes best distills the reality of the current economic situation is the level of real interest rates ( interest rates minus inflation). Real interest rates help provide a solid preview of whether inflation is likely to accelerate or not.

And real interest rates will be the best warning of a possible end to the inflationary cycle because real interest rates represent the true price of the money.

* When real interest rates are high, money is expensive. If it persists, the days of inflation are numbered.

* When real interest rates are low, money is cheap and inflation is bound to continue.

* When real interest rates are zero, money is effectively free, leading inflation into overdrive.

* When real interest rates are below zero, borrowers are, in effect, actually getting paid to take the money, which is the prelude to double-digit inflation.

Today, the Fed has dropped the fed funds rate to 2%. But the CPI inflation, even with all its distortions, is now close to 4%. So the real interest rate is 2% below zero. Until and unless the level of real interest rates rises back above zero, oil and commodity prices will continue to surge, import prices will continue to jump, the dollar will continue to lose value, and inflation will continue upward.

To protect themselves, Weiss recommends investors:

* Buy inflation hedges. This can be accomplished through exchange traded funds (ETFs) that own (or track) the inflation hedges, such as StreetTRACKS Gold Trust (GLD) or iShares Silver Trust (SLV).

* Consider energy-related investments. Oil, natural gas and alternative energy sources are in the vanguard of this round of inflation, with no end in sight. Stocks and ETFs tied to their rise are bound to continue to benefit.

"Diversify out of the U.S. dollar by buying the strongest foreign currencies. Although the dollar could enjoy a nice rally in the near term, the long-term outlook remains negative. Even if the Fed pauses its recent rate-cutting, and actually raises rates, as long as real interest rates in the U.S. remain below zero, it's unlikely to provide lasting support for the dollar," Dr. Weiss exclaims.

To read this issue online, please visit:

http://www.moneyandmarkets.com/Issues.aspxThe-Prelude-to-Double-Digit-Inflation-1774.

About MARTIN D. WEISS & MONEY AND MARKETS

Martin D. Weiss, Ph.D., founder and president of Weiss Research, Inc. and a leading advocate for investor safety, is a nationally recognized expert on domestic and international financial markets. With more than 35 years of experience, including many years in Latin America and Asia, Dr. Weiss has helped empower millions of investors to make better financial decisions through his monthly Safe Money Report and daily Money and Markets.

Dr. Weiss' keen understanding of foreign markets and the global economy has earned him a reputation for thoughtful, in-depth analysis that investors can rely upon to make informed financial decisions. Regularly called upon by the media for his independent investing guidance, he has been featured in publications nationwide, including The Wall Street Journal, The New York Times, Chicago Tribune, Investor's Business Daily, and Forbes and has also appeared on CNN and CNBC.

Throughout his career, Dr. Weiss has been an advocate for consumers and investors in the insurance, banking and brokerage industries, dedicating his time and resources providing analysis and data for Congressional testimony, constructive proposals for reforms in the securities industry and legislation for full financial disclosure as well sound accounting and fiscal policy. In November 2004, he launched the Sound Dollar Committee, a nonprofit organization dedicated to building a network of investors seeking to protect the nation's future by demanding honesty in government accounting, a balanced budget and sound economic policy.

Dr. Weiss is author of The New York Times best-seller, The Ultimate Safe Money Guide, which gave baby boomers a road map to grow their wealth safely. It was listed on the New York Times Business, Wall Street Journal, and BusinessWeek best-seller lists, as well as the Barron's Roundup for 2002.

Dr. Weiss holds a bachelor's degree from New York University, a Ph.D. from Columbia University and is fluent in eight European and Asian languages.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.








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