Insanity: Repeating the same thing expecting different results.

December 10, 2010 – What is there about the Fed policy that keeps driving up gold and silver prices? In an article for the Wall Street Journal Steve Forbes posits that it is Bernanke’s stubborn adherence to an economic theory known as the Phillips curve. According to that New Zealand economist, stronger growth requires higher inflation and lower inflation requires higher unemployment. “In other words, stable money is bad for the economy.”

To most of us that notion sounds ridiculous. Simple observation tells us that economies backed by strong currencies fare far better. We need look no further than our own country in the 1970s to see how inflation bogged down the economy and created a decade of declining equities and unemployment even higher than today.

Still, Bernanke insists that "Inflation that is too low can pose risks to the economy–especially when the economy is struggling." The Feds quantitative easements have that in mind, despite warnings from every quarter that inflation could run away and asset bubbles could form.

As it turns out, those fears have yet to be realized. However, the same is true for the goals of Fed policy. Long term interest rates are up sharply and the extension of tax cuts is expected to push bond yields back upward due to the increased deficit and fears of inflation. The dollar has defiantly resisted the weakening which was intended to boost exports but which many feared would also fuel inflation.

The reason things aren’t working according to plan is that global events have overwhelmed the relatively minor Fed moves. With no major reversal in philosophy likely we can expect Bernanke to simply try a bigger hammer, and this time he just might achieve the instability he believes is necessary for recovery. Gold and silver investments will be welcome shelter when that storm hits.

Shannon King

Senior Staff Writer –

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