With the announcement this week that it would keep key interest rate near zero at least until the end of 2014, the U.S. Federal Reserve added a crack in the foundation that supports the dollar, said Peter Schiff, president of Euro investment fund Pacific Capital. In an unsuccessful attempt to provide clarity and transparency, Ben Bernanke, the Fed chairman, has actually brought to light only one way forward for economists and investors. Signs are easy to understand, in Schiff’s opinion: Fed will not stop from reaching its targets, which include establishing a phantom GDP growth, controlling unemployment, supporting the stock market and house prices, and monetization of government debt.
To fulfill the plan, it will continue to support a policy of negative interest, ignoring the collateral damage created by an unsustainable debt, a virulent inflation, poorly allocated resources and credits, and a devalued currency.
According to Schiff, it is not surprising that precious metals and foreign currencies have recovered strongly after this news – the gold climbed to over 4.3% and the dollar index fell by about 1.6% the day after the announcement. Dollar index is now down 3.5% from its peak in mid-January.
The only good part of the announcement is that it provides investors in precious metals and foreign currency a quite clear feeling that they are on right side of history. To keep interest rates down, the Fed is forced to print money constantly to buy U.S. Treasury. This will push even more investors towards gold and away from assets denominated in U.S. dollars, considers the president of Euro Pacific Capital.
As long as key interest remains under inflation rate, the U.S. economy will fail to restructure in order to pursue a long lasting recovery. As a side effect, the Americans with savings in banks will continue, most likely, to suffer from a low yield and a currency that weakens. Finally, the delay of the collapse of the U.S. economy will be more spectacular due to the long distance traveled, Schiff concluded.
