The Federal Bank has been pumping in an unprecedented amount of money in the market through its stimulus packages. The stimulus packages, which were started post the 2008-recession with a sole purpose of recovering the economy, have contributed a lot more to the bubble-like valuations of various assets like stocks, bonds and real estate rather than actually repairing the economy. The US economy is currently at the mercy of this ‘money supply’ and a withdrawal of money from the system can wreak havoc, leading to a financial collapse which could make the 2008-recession seem like a day in the park.
The fate of the US economy currently hangs on a thin wire and the Fed knows that the ice is thinner on the way forward. The economy has been crawling at best on its way up since the 2008-debacle, but the asset valuations say otherwise. In the name of fighting deflation (inflation is still near 2 percent), the money printing policy of Fed has created a surplus of dollars in the system thereby devaluing the US currency. Assuming that the Fed has doubled the dollars in the system, a retailer, which was earlier selling a product for $1 will now have to double the price to discount the devaluation in the currency, hence contributing to inflation. The continuous pumping of dollars and the subsequent devaluation will result in a high-magnitude inflationary reaction called as hyperinflation.
So, while the Fed is trying to free the economy from the claws of deflation, it is simultaneously paving the path for a vicious, inflationary spiral, which will be an even harder evil to ward-off. And the investors who have taken loans at rock-bottom interest rates will then have to bear the maximum brunt of the financial collapse and the worst part is that it is unavoidable and unpredictable. Hence, one must look for sectors or assets which insure against such risks: precious metals such as Gold, Silver and Platinum provide hope for those times.
By: Nikhil Gupta, Financial markets Researcher/Analyst