Tags: federal reserve | janet yellen | inflation | economy

Yellen Seeks to Keep Inflating Bernanke's Fed Tactics

By    |   Sunday, 24 November 2013 09:21 AM

When I’ve been on business-news TV recently and I get asked about my thoughts on Janet Yellen becoming the next chief of the Federal Reserve, I tell them that she will very likely make what Ben Bernanke has done look like child’s play.

Like nearly most Fed officials, she’s in love with the thought of continuing to stimulate the economy through printing money. At least that’s what those officials think they’re doing when they print money.

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But if printing money could lower the unemployment rate or spur economic growth, then $85 billion per month would have brought down unemployment and have us in a thriving economy.

Well, we know that’s not the case. So obviously, money printing doesn’t bring about job creation.

Nonetheless, try to tell the Federal Reserve that! They either know better and simply lie about it — or they’re fooled by their own tactics. They’re such smart people, I tend to think it’s the former. But the end result of their actions is the same.

I listen closely to what the head of the Federal Reserve says because it sets the tone for how I invest. And what I’ve found is that I need to make sure I stay right where I am with my investments. Why?

Here’s what Yellen recently said:

"There is growing concern inside and outside the Fed that inflation is not rising fast enough. Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment..."

She thinks that inflation is too low and growing far too slowly. So what is she going to do when she takes office? You know she’s going to do her very best to stoke the fires of inflation.

Her thinking goes like this:

Inflation is valuable particularly when the economy is weak because it helps companies to increase profits. She also believes that this will help wages to rise and borrowers to repay their debts. She also believes that people will borrow more money and spend it more quickly.

Now, that’s flawed thinking.

Why? If the economy is weak, do you want your costs to rise?

Heck, no! You’d already be struggling enough as it was without prices going up too.

But what about her argument that corporate profits will rise. That’s flawed, too.

Why?

The average company has to buy raw materials and make their product to sell. If the costs of their raw materials continue to go up, their profits will shrink. Some people might say, “Yes, but they can pass along those costs and raise the prices of their products.”

And in a strongly growing economy, I’d say you’re right.

However, consumers reach their breaking point more quickly in a weak to slow-growing economy. Corporations realize this and so it’s at that stage that they have to eat those costs rather than pass them along to consumers.

They can only begin to make up for that when the economy becomes robust again (but don’t hold your breath for a robust economy anytime soon).

By the way, the type of companies we hold in the Ultimate Wealth Report ARE the companies that will benefit from Yellen’s higher inflation thesis. They are the ones that own the assets that would get inflated and sell on the market for ever-higher prices. So yes, they’d make more money.

And so would we, as shareholders of these companies.

But the average company out there is NOT in that situation as the companies that we hold.

So I’m optimistic for my subscribers because of the type of companies we hold. We hold stocks that will benefit from inflation’s rise and the dollar’s continued devaluation. So that’s why I’m optimistic, even in a gloomy economy.

Back to Yellen’s thesis once again — she believes that inflation will help wages to rise as companies raise prices and make more money.

Well, if you’ve had a pulse for the past five years, you know that corporate profits can grow and that doesn’t mean you see your share of it through wage increases. So that’s a misguided thought, too.

You see, everything she says “sounds good on paper” but simply isn’t the case in the real world that we all live and work in.

What about Yellen’s final point about people borrowing more in an inflationary environment?

Well, right now, it’s hard for people to get loans even if they wanted to.

Also, when you’re borrowing money, you have confidence in the future of your job and its longevity as well as that of the overall economy.

But when times are tough and the economy is sluggish and you’re still not feeling all that great about your job — are you going to go out there and buy that next expensive house or car? I doubt it.

If anything, you might ratchet down your debts by going to cheaper housing and less-expensive cars, thus deleveraging your life in the uncertain times.

The good news is that even if loans are few and far between for homes, which would do well in an inflationary environment, you can still buy shares of commodity-stocks. These are companies that mine, drill and produce commodities that we all need like oil, natural gas, copper, etc. You can buy one share or 1,000 shares. In other words, you set the pace at which you dive into the investment.

But do I really think it’s necessary to be in assets like these? In the words of Sarah Palin: “You betcha!”

The government is so indebted that it HAS to inflate so that they can pay back future debt in cheaper dollars. Additionally, this is something they’ve done to some degree or another since we ditched the gold standard in 1971.

In fact, real wages haven’t grown since around 1974 or so. By this, I mean that the wages that one gets and what can be bought with those wages really hasn’t grown over that time. They’ve flat-lined while corporate profits have continued to soar until recently during the past handful of years.

So, here’s how the inflation game works. If your wealth is solely tied to getting wages through your labor, then you’re going to become poorer and your standard of living will be reduced more over time.

However, if you’re a company that owns hard assets (commodities), then you’re going to prosper. AND if you’re a shareholder in these companies, you also are going to prosper.

Inflation penalizes the laborer of wages but benefits those who own assets that benefit from inflation. In other words, it’s like a hidden tax. The laborer is taxed and that tax essentially goes to the owner of the assets that are being inflated. It doesn’t increase the overall wealth of the nation but it does swap around who has the wealth.

I hope you see now why, even though you may be a wage earner, that you need to be buying some commodity-producing companies and holding onto those stock shares through the coming inflation.

It will largely be the factor of whether you remain in the middle class or if you become one of the poor.

Make the right choice now and you’ll have a brighter future.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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Janet Yellen is in love with the thought of continuing to stimulate the economy through printing money.
federal reserve,janet yellen,inflation,economy
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2013-21-24
Sunday, 24 November 2013 09:21 AM
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