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Europe Set to Hike Rates, as US Watches and Waits

By    |   Monday, 04 April 2011 08:24 AM

Most of the industrialized world has kept their interest rates as close to zero percent as they could stand — and for as long as they could stand, too. However, that is all about to change as inflation keeps soaring higher and higher and hasn’t shown the slightest hint of falling on its own.

Just one example of this is the fact that oil hit a new 52-week high on Friday of $108 a barrel.

That’s a trend that is not likely to change anytime soon with all that is going on in the Middle East and with all of the production that has been tapered back or taken off-line due to the war.

Join the 3.5% of Americans who are truly wealthy and financially secure.
So who is the next central bank to step up to the rate-hiking plate? It will be the European Central Bank. They will take interest rates up by at least half a percentage point Thursday.

Who will likely follow them? If they have any sense, it will be the Bank of England.

While inflation in the eurozone is 2.6 percent on a year-over-year basis, the United Kingdom already has inflation as high as 4.4 percent over the same period.

In fact, the United Kingdom has double the inflation of most of the G-7 nations. So if they are smart, they won’t delay any further in their rate hikes, either. However, they will announce interest rates on Thursday too and it’s likely that they will hold interest rates steady this time around.

In the last meeting, there were only about one-third of the voting members that voted for a rate increase in the United Kingdom. So it may be a while longer before these guys wake up and smell the inflated coffee.

In my opinion, the United Kingdom is playing the most dangerous game with inflation. They normally start hiking interest rates at 2 percent or 2½ percent. Now they’ve waited until inflation has gotten to almost twice that level before starting to attack inflation.

There are two problems that I see with that.

• Once a central bank starts hiking interest rates, it takes arguably 6 months to 18 months before that rate hike works its way into the economy so far that it starts to bring down inflation.

• The second issue is that inflation doesn’t grow in a straight line. At some point (usually in the 5 percent to 6 percent area), inflation starts to go parabolic and it heads for the moon.

In other words, inflation can take years to go from 1 percent up to 4 percent. On the other hand, it can go from 6 percent to 12 percent in the span of one year.

So they are supposed to stay on top of inflation as a central bank or inflation can and will get out of hand very fast. They also are supposed to start tackling inflation early on when they see that inflation is growing toward the top of their target level of 3 percent.

They could have been sitting on their hands too long at this point.

Their argument is that there will be a slowdown in their economy that will bring down the rate of inflation by itself and that the recent increase in taxes will slow things down too.

But if they are wrong, they’ve lost a very “high stakes” gamble.

Let inflation soar to 10 percent to 12 percent and gobble up the people’s purchasing power at two or three times the speed that it formerly did and see if the current politicians are able to stay in office. They would be booted out.

As that starts to dawn on these politicians, they will put more pressure on their central bankers. But by then, it may be too late.

Think the Bank of England is being stupid all by themselves though? We may be playing the same stupid game here in the U.S. with all of the money printing that has devalued the dollar and shot up the cost of goods all over the place.

In fact, if you’ll look at how much the Dow has gained and how much the dollar has lost, you’ll find that really the government is pulling money out of one of your pockets and putting it in another and calling that prosperity.

After all, let’s just say that stocks go up by 6 percent but the dollars that they are denominated in go down by 6 percent. Have you really made anything if the purchasing power of those dollars has eroded at the same pace?

To further prove this point, you can look at the price of the Dow (or any other U.S. index) as priced in gold and you will see that the Dow in “real money” terms has gone sideways. Yet in “falling dollar” terms, it hit a new 52-week high.

There are stocks that have been rising all around the world, but all of them haven’t had the currency erosion that we’ve experienced.

So watch out for the U.S. “false prosperity” game that we’re playing over here in American too. That one will most likely come back to haunt us too.

This is all a great reason to be involved with foreign currencies that aren’t being eroded away by the plans of their own government.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.

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Most of the industrialized world has kept their interest rates as close to zero percent as they could stand and for as long as they could stand, too. However, that is all about to change as inflation keeps soaring higher and higher and hasn t shown the slightest hint of...
Monday, 04 April 2011 08:24 AM
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