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Fear and Loathing in America's Age of ZIRP

You've surely heard by now that the Federal Reserve has effectively lowered interest rates to zero. Obviously having learned nothing from the mistakes of Japans's decades-long recession, Ben Bernanke & Company have instituted their own Zero Interest Rate Policy (ZIRP). By artificially lowering interest rates, many economists predict that the Fed will actually delay economic recovery for many years. ZIRP was a failure for Japan, and I predict that it will be a spectacular failure for the United States.

The Fed could, in fact, lower interest rates below zero, to the so-called "Super Zero" range. Such absurdities are not impossible in this wacky age. Just look at what is already happening (much as I predicted): Using Trillions of taxpayer dollars, the Federal policy wonks and their bankster buddies are attempting to reanimate a collapsed housing marked, defrost a globally frozen credit market, and turn several Detroit auto manufacturers that are bankrupt into corporate zombies. Any shred of fiscal restraint has be thrown out the window. And if you are saying to yourself "super zero rates will never happen", then ponder this: If you factor in the prevailing inflation rate, then the ZIRP has already created super zero conditions, for all intents and purposes.

Deflation, Then Inflation
We will soon be living in some uncomfortably interesting times. As I've mentioned before, we could see simultaneous inflation and deflation. But, in general, I predict that in the US 2009 and 2010 will be sharply deflationary, but that the subsequent years will be distinctly inflationary. You need to be watchful and ready for these sea change shifts. Don't hesitate to restructure your investments accordingly, once the changes becomes evident. Anyone that hesitates--the proverbial "deer in the headlights"--will surely become investing road kill, wiped out by the onset of rapid inflation.

Where does the Hunter Thompson style "Fear and :Loathing" come in? The fear will be an almost universal visceral reaction to declining stock prices, declining real estate values, and monumental corporate layoffs, in the unfolding deflationary short cycle. In the short term, cash will be king. People will fear getting laid off, they will fear making unnecessary expenditures, and they will consequently hoard their cash and try to minimize taking on new debt. This new mindset of deflation will soon become the norm. Dollars will be systematically hoarded. But not long after, to the surprise of many, cash will suddenly become trash. The citizenry will soon learn to loathe the dollar, since its purchasing power will wither with increasing rapidity as inflation escalates.

The Mass Inflation Trigger
The new mass inflation will be triggered by foreign creditors coming to the recognition that Federal spending for the Mother of All Bailouts (MOAB) has gone out of control and that the US Dollar is doomed. Once they do, it will start a cascade of events culminating in the utter destruction of the US Dollar as a currency unit. The first indicator will be the failure of US Treasury auctions. This will be accompanied by a sharp drop of the Dollar in foreign exchange. (Watch the US Dollar Index closely!) Then will come news of rapid monetization of the Federal debt. And last will be the rapid stair-stepping of consumer price inflation, well into double digits, and possibly getting out of control into triple digits, once the near hysterical psychology of inflation comes into full swing. (The perception of inflation becomes self perpetuating. This happened in dozens of countries in the last century.) The tidal shifts, first to sharp deflation, and then to rapid inflation will overwhelm many people. I can foresee that having the deflationary mentality suddenly inverted will be just too much for many people. It will be hard for them to mentally "switch gears", and their net worth will consequently suffer, once stagflation begins.

In times of rampant inflation, holding cash will be foolish. Pensioners and anyone else on a fixed income will have their savings wiped out very quickly. So just a couple of years after getting used to hoarding cash, people will suddenly have to learn to hate cash, in deference to tangibles. Much like the situation I described in the opening chapter of my novel "Patriots: Surviving the Coming Collapse", more and more dollars will be chasing fewer and fewer available products. If the 20th Century taught us anything, it is that these situations can quickly spin out of control.

The Future for Precious Metals
The pendulum swings in manipulated markets tend to be very wide, making wildly exaggerated moves. Witness, for example, the meteoric rise in crude oil prices for the past two years, followed by a veritable crash in recent weeks. I predict that the precious metals market will continue to be in the doldrums for perhaps the next 12 to 18 months, making just modest gains. But then once inflation kicks in as confidence in the US Dollar vanishes, gold, platinum, and silver will skyrocket. My advice follows a simple age-old adage: buy low and sell high. You should begin buying precious metals now, while they are relatively low. If you wait until inflation kicks in, then it will be too late to shelter your assets.

If and when you decide to liquidate part of your precious metals holdings in the midst of a mass inflation, do not trade your metals for greenbacks or other paper currencies--since they all inevitably share the same fate. Trade them only for productive tangibles. Buckle your seatbelt for what will surely seem like a very bumpy roller coaster ride. For most Americans, it will be a ride to financial ruin. But for an astute and perspicacious small minority, it could very well turn out to be a ride to safety and perhaps even to financial independence. Be ready.

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