Higher Interest Rates Won't
Help the Dollar
Peter Schiff
May 26, 2006
As U.S. inflation is beginning to be taken a bit more seriously,
the dollar has found some temporary support as traders anticipate
higher interest rates from a more aggressive Fed. Ironically,
foreign investors attracted to the higher yields will be stung
by the declining value of the dollar which must result from higher
inflation. (See my commentary of April 6th 2005 Hello,
Inflation is not Good for the Dollar). Therefore, even if
in the short term higher rates may buy the dollar some time,
in the long run the dollar will buy much less. However, even
if we were to ignore inflation's impact on foreign exchange,
the investment logic itself is flawed as it does not factor in
the U.S. economy's vulnerability to higher interest rates.
To be viewed as bullish for
the dollar, inflation is operative only when one believes that
the Fed is firmly committed to fighting it. Lost in translation
is the fact that the Fed's anti-inflationary rhetoric may be
just that - rhetorical. While bad news for savers and investors,
higher inflation is actually the government's best friend and
is the most politically expedient way to resolve America's economic
imbalances and reduce the real burden of repaying its own debts.
When higher interest rates
really start to take their toll on consumer spending and home
prices, the Fed will either do an about face and start cutting
rates in a desperate attempt to revive the economy, or it will
continue to raise them, deliberately pushing the economy deeper
into recession. Both scenarios are bearish for the dollar, and
it is only a matter of time before the market figures this out.
It is also ironic that Stephen
Roach, who recently capitulated his long-held bearish position
on the global economy, just added his voice to the chorus calling
the rise in commodity prices a bubble. His principal reason
for doing so was his observation that given that there is no
inflation, commodity price increases of the magnitude recently
experienced were unwarranted, and should therefore be reversed.
That is like expecting an obese individual to lose weight simply
because he claims to be dieting, while ignoring his third trip
to the buffet table.
The fact that Wall Street's brightest stars accept the current
environment as non-inflationary, while they stare at commodity
prices that skyrocket on a daily basis, demonstrates how successful
the government has been in its disinformation campaign. With
the bill of goods firmly grasped, they expect prices to fall
rather than question the inherent irrationality of the government's
claims. Just as Roach's declaration that America's economic
imbalances were no longer problematic likely means that they
will soon weigh heavier than ever, his pronouncement of inflation's
absence likely means it is finally about to spiral out of control.
Don't be fooled by government
propaganda. Protect your wealth and preserve your purchasing
power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com.
Download
my free research report on the powerful case for investing in
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Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Inc
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