Will the fed hike rates in 09?

Economics Economics Questions
1

Hi all this is my first mises.org forum post, I have been thinking a lot recently about the current climate and I have read much on the idea that once the election is over in the US (Nov 08) the fed will look to quickly tame inflation by hiking rates and try to contain inflation so to look for a boom come 2012.

Looking at the 1970’s we saw a period when gold declined after a peak in 74 which was not broken until early 78. Could we see the fed look to try and break inflation and gold consolidate for a few years?

Interested in yours views, I am leaning towards a consolidation but at say 800-900 after a blow off to maybe ~1200?

How does the Austrian business cycle fit this idea?

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Just a nubie to Austrian Econ. myself, but welcome to the forum, alexc!

I’ve been wondering the same types of questions about where this inflation is headed. There are two sides of the coin to the question of so called price “inflation”: nominal supply and actual demand for money. Times have changed alot since the 1970’s, and on both counts I don’t see that the Fed would necessarily be able to contain inflation, even if they tried.

On the supply side: The government has grown many times over since the 1970’s. The war in Iraq shows no end in sight. Unfunded obligations such as S.S. are soon coming due. The Federal Reserve must continue to monetize the ever-increasing deficit.

On the demand side: The US dollar has lost it’s status as world reserve currency. Many countries are threatning to dump their dollars back on US market. Various commodity exchanges are moving to other currencies, again reducing demand. As purchasing power is eroded, many individuals will try to protect their wealth by buying Gold and Silver or just about anything they can get their hands on, further reducing monetary demand.

As far as I can see, the only inflationary pressure that could be contained with rising interest rates is the private loan market. Government does not care what is the interest rate on it’s debt, since it has unlimited credit with the Fed and no intention or ability to ever pay back the official “debt”, which is no more than an accounting illusion. But, if private debt is contained while government debt continues to grow, this inflation “buffer” will shrink until there is no recourse left. Perhaps as a last resort, direct confiscation through taxes would be increased dramatically to try to make up the budget shortfall and delay total collapse of the dollar. But I have my doubt as to how a tax revolt would be prevented.

On the bright side: when the parasite consumes it’s host, it too perishes.

I asked the question in earlier post (without response), as to what factors would prevent the normal business cycle (explained so well by Mises and other Austrians) from degrading into a hyper-inflationary “crack-up” boom. I saw this book that looked interesting. Has anyone read it? Please don’t take my speculation too seriously. I hope some more experienced members can provide a more informative perspective.

But, as for gold, I think you’re alot safer buying than not, unless you have some more promising investment ideas. Anything to get rid of fiat, just hide it well. I suspect that once $1000 is cleared, there will be no going back. Surely we’ll be over $1200 long before the election.

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“we are in uncharted territory” HOWEVER…

In terms of financial market securities trading (commodities included) and price speculation i argue that the Austrian School promotes the idea that the price is a reflection of the combined human action of the market participants.

At this point March 5, 2008 there is no indication that gold will turn or crash based on the technical elements in the forseeable future. The reality is that at some point (1200, 1500, 2000??) their will have to be a correction because the largest owners on the world market with the most market power will decide that they have achived the maximum marginal return relative to alternative investments…Imagine owning 1thousand Gold ounces, and looking at your portfolio valued at 1 million dollars of unrealized gain… [1000oz * $1000].

I believe that rounded nominal figures have a psycological affect. At some point …their is a tendency to “take profits” or convert the investment. At any given price an individual or single participant will be looking for even greater returns and selling a negligable amount has no affect on overall demand. But when the LARGEST participant with the most market power decides to divest, this does affect the entire market . Naturally the chain of events that follows creates the essence of a market crash or “burst” of the speculation bubble.

When the largest participant sells in an attempt to lock in the greatest profit, the action creates an excess supply for sale in relation to the total demand. The price goes down. Other participants with rational decision making will decide to lock in profits by selling and further lowering the market price. As the unrealized value or paper profits of participants erodes the ensuing action is a run to sell to lock in profits essentially crashing the markets. The problem with gold is that it is a commodity which has a material function of manufacturing jewlery. The idea of gold as store of value only holds when it is commonly accepted that the ownership to be a positive investment, discounted to present value.

My point is that when gold “turns” there is no forseeable bottom.. $500, $400, $200??.. alot of people are going to be holding alot of overpriced gold and losing alot of “money”, real purchasing power. It is nieve to think that a consolidation is realistic at $900… and even crazier to think that gold can continue a movement towards $2,000. Their needs to be a correction and when it does “correct”, the preverbial bottom is the time to invest. Speculate now.

On the question of interest rate hikes… i expect to see 2% in this year and a few quarters with that rate fixed… And then a climb to 5% again just like last time. Im betting that im right.

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Wow, are you serious? You think the inflationary fiat US dollar in going to gain between 2x to 5x in value from present values? Are you expecting a massive deflation? A huge rise in demand for US dollar? You seem to be arguing for a rise in demand, investors being fooled into thinking they’ve made gains. Based on your argument, you should probably sell your 1000oz’s in Zimbabwe. Over there you’d be a multi-trillionaire, not just some puny millionaire.

I think your error is to equate the nominal price of gold with it’s value. [edit: Haha, I just read your post script. At least your modesty is such that you admit so yourself.] The “bull-run” to $1000 is not an indication of rising value at all. Purchasing power of a gold ounce in terms of oil, wheat, corn and other basic commodities has not increased one bit. Of course, you’re correct that there are variations in the real demand for gold, and a panic could drive that real demand to unsustainable levels. This would have to be a global panic and is not what we’ve seen so far. Gold is a (stable) global currency whereas the US dollar is becoming no more than a (declining) regional/local currency. As such, the price of gold is a far better indicator of the value of the US dollar than it is of it’s own value.

Any one holding 1000’s of oz probably already views gold as the only important currency and is not going to jump out of their life boat and into a sinking ship! I think $1,000,000 per oz (maybe in decades, maybe sooner) is a much more likely future than $200 or even $500 ever again.

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Thanks for the replies all, I find dvictr idea about a point when there will be a lot of people holding a lot of over valued gold interesting, however I feel the idea that we have that situation now not very realistic (I am the only person I know who owns any gold, however I am starting to see and hear it talked about, this is however quite different from these people actually influencing the market through buying).

dvictr I think your idea of 2% this year and a climb to 5% next year sounds quite plausable, however would this kind of rise really deal a significant blow to inflation? or mearly produce a correction and consolidation period before further advances?

Off the top of my head gold got to nearly 200 in 1974 and then lost ~50% for the next few years, if we look at a simalar situation say we hit 1200-1400 then correct to 500-700? or is this even too much given the global nature of the world’s economy and the speed of communication etc.

I am always trying to keep an open mind to new factors that can alter my views, so any counter views are always welcome!