>>> When concerns about recession are rife, the central bank will be tempted to subordinate the fundamental need to maintain a reliable currency, to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the US did in the 1970’s, and wind up with stagflation. The Fed has a particular duty to defend the integrity of the fiat currency in its charge.<<<
But the political lackeys at the Fed take their marching orders from the Bush White House and US “Plunge Protection Team” commander Henry Paulson, who are calling the shots on monetary policy. “I’ve got confidence in the Fed and I’ve been very supportive of what the Fed has done and what the Fed is doing,” Paulson said after the central bank lowered its key interest rate 0.25% to 2.0 percent.
The latest shake-out in silver and gold may have a little further to go, but for investors betting on higher commodity prices in the longer-term, fueled by strong Asian demand, explosive money supply growth, and negative interest rates in the United States, one should recall the advice of the London trading wizard Nathan Rothschild, “The time to buy is when the blood is running in the streets.”
ECB Hawks Trip the Precious Metals
Unlike the rookies at the Bernanke Fed, the hawks at the European Central Bank aren’t bullied by politicians or German schatz traders in Frankfurt, who campaigned hard for a series of ECB rate cuts in the first quarter. German 2-year yields fell as low as 3.10% in February, or 90 basis points below the ECB’s repo rate, anticipating rapid-fire rate cuts to re-inflate the battered European stock markets.
But fighting inflation is the top priority for the ECB, said Greek central banker Nicholas Garganas on Feb 6th. “Our monetary policy is not led on what the markets expect. I’m very concerned about the high inflation rate. Inflation risks remain on the upside,” he said. Consumer price inflation in the Euro zone hit a 16-year high of 3.6% in March. But when German schatz yields still refused to move higher, Bundesbank chief Axel Weber stepped in to set the markets straight.
“Interest-rate expectations for the Euro region don’t reflect the monetary-policy assessment of a central bank that’s obliged to maintain price stability. Be assured, our aim is and remains price stability in the medium term,” he said on Feb 27th. Then on April 17th Weber said, “Recent wage dynamics in conjunction with elevated and persistent energy and food price pressures have increased the risk of a prolonged period of intolerably high inflation,” ruling out an easier monetary policy.
“Against this background, we will have to continuously monitor closely all incoming data and evaluate whether the current level of interest rates in fact ensures achieving our objective,” Weber warned. With the recovery of the European stock markets above their March 17th lows, German 2-year schatz yields eventually shot higher to within spitting distance of the ECB’s 4% repo rate.
The ECB has kept its repo rate steady at 4% for eleven months, and throughout the US sub-prime mortgage crisis which began last summer, in sharp contrast to other members of the G-7 central bank cartel, such as the Bank of Canada, England, and the Fed, who capitulated to political pressure, and slashed their overnight lending rates, despite signs of explosive commodity inflation and money supply growth.
While the ECB has held its repo rate steady at 4% this year, Jean “Tricky” Trichet has pulled another fast one, allowing the 3-month Euro Libor rate to climb 45 basis points higher to 4.85%, thus engineering a clandestine tightening of monetary policy. Higher Euro Libor rates are indicative of instability in the European banking system, with its arteries clogged by toxic US mortgage debt.
But unlike the Fed and the Bank of England, the ECB hasn’t taken any extraordinary measures to flood the banking system with excess liquidity, and counter the sharp rise the Euro Libor rates. Combined with open mouth operations to push German 2-year schatz yields higher, the ECB has managed to steer money away from the precious metals markets and into higher yielding European credit markets.
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