Rick Rule, the legendary investor, has some thoughts on the Federal Reserve’s newly announced policy of low interest rates through 2014.
My thought here is a reflection on statements by senior US monetary officials and the world’s reaction to them. There are two statements from the Federal Reserve I find interesting. The first signaling to the market they are going to keep interest rates close to zero for 3 years. The second saying they intend to have the general level of pricing in the US increase by 3% per year.
What those officials are saying to the world is that to borrow money, the US government is going to keep interest rates close to zero. What that means is investors are going to get a close to zero return. At the same time they will be attempting to cause prices to increase 3%, thus depreciating the value of the currency by 3% per year.
What the US Treasury is, in effect, saying to entities who buy Treasury securities is that if you buy them you will achieve more than a 9% loss in 3 years. So the guiding forces behind the world’s reserve currency can say to savers around the world, ‘Send us your money and we promise that we’ll give back 9 to 10% less three years from now,’ and the offer gets accepted on a global basis.
He thinks we are entering into a period of extreme market volatility.
He says that the Federal Reserve is pumping in new liquidity (fiat money). “So on the one hand there is astonishing liquidity being pumped into the system by the Fed.” He is wrong. The FED did pump it in during the first half of 2011. But it has ceased for now.
I provide the statistics on my other site, Gary North’s Specific Answers. You can follow FED policy in the free department, Federal Reserve Charts. Look at this chart: Adjusted Monetary Base: Short Term.
These are crises ahead: war, municipal bond defaults, sovereign debt defaults. “There are lots of potential shocks to the system.” He thinks a default of $300 billion will hit Europe.
How to prepare? To begin with you are going to need to maintain liquidity, even though maintaining liquidity, in current terms, is going to cost you some money. Does that mean you maintain all of your liquidity in US dollars? Personally I am not doing that. Personally I am trying to maintain about 1/3 of my liquidity in physical metals or proxies for physical metals.
For his other investments, click the link.