In simple economic terms of supply and demand we know that increasing supply reduces the value of the item in question, which in this case is the USD. Some people mistakenly believe that by having a weak USD this will help exports and increase competitiveness in international markets, but in reality it will now take more USD to buy imports; raw materials, oil, and all the gadgets and toys we all love.
Apparently the Federal reserve chairman Mr. Bernanke didn't pay much attention to history because debasing one's currency has never increased competitiveness and has led to the decline of one powerful nation after another. The key to having a wealthy and successful nation is by becoming a creditor in possession of a strong currency, where as the US is now the largest debtor nation in the history of the world with a weakening currency. The term debasing actually comes from the Roman empire when politicians decided to gradually reduce the gold content of the pure gold currency of the time by adding base metals. Golds coins went from %100 purity, to %50 purity, and eventually less than %10 of a coin contained pure gold, and we all know what happened to the Roman empire shortly after. Mr. Bernanke is said to have studied the great depression as a focal point of his academic career and yet seems to possess incredible ignorance when it comes to money printing and inflation..
Lessons from the German Weimar Republic have not been learned. In Germany in 1923 at the height of hyperinflation the Weimar government printed such an enormous amount of money the exchange rate of one German Mark to the US dollar was 1 trillion to 1. Stories persist of people with wheelbarrows full of money trying to buy a loaf of bread only to find their wheelbarrows went missing when they left the store and the paper money was left behind.
It would seem the US is heading towards a hyper-inflationary depression in the long term, as the US has crossed the line of no return in terms of money printing, as they have no other options to prevent deflation (decreasing prices) in the future other than repeat money printing operations.
The Federal Reserve and You
So what does all this mean for the average investor or the sophisticated trader?
1. Avoid US government bonds like the plague, (avoid all bonds really) and don't look to currencies as a store of value. (There has been a 30 year bull market in US bonds, no market goes up forever... In addition the Fed purchases look to be creating a bubble in the bond market.)
2. The stock market may continue to rise over the next 5-10 years but for the wrong reasons... All the money printing and easy money borrowed at excessively low interest rates creates dollars looking for a place to go and that place is generally the stock market. The stock market isn't going up due to increase in production or creation of real value, therefore an informed investor should not be looking to the stock market over the long-term to create wealth. The buy and hold strategy is not going to work from now on.
3. The commodities market and real assets is the place to be in terms of store of value and wealth creation. Real assets such as rice, corn, sugar, oil, silver, and gold are going to increase dramatically over the next 10 to 20 years due to supply shortages alone, but the other important factor driving higher prices will be money printing and inflation. The precious metal or monetary metals as they are some times called will be a key to protecting wealth in the future but agricultural commodities look equally attractive, especially considering agriculture has been suppressed for 30 years.
