According to the WSJ: The Fed plans to consider a modest but symbolically important change in the management of its giant securities portfolio when its members meet next week. The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead.

It apparently isn't enough that the Fed has increased base money from $800 billion to $1.99 trillion in just a few years. Now they are mulling over the idea to stop the base from shrinking as MBS are paid off. What is particularly interesting to note is that commercial banks don't really need an amount close to the reserves they already have to hyperinflate the money in circulation. Because of a process called sweeping, most new bank deposits are swept into time deposits that have a zero percent reserve requirement. Therefore, even a minuscule monetary base can be used to create massive inflation.

But that hasn't deterred the Fed from continuing its war against deflation. The ISM released its July report on business yesterday. Inside the tepid PMI was the Prices Paid component. The index rose to 57.5 from 57. Most noteworthy was that the prices paid index increased for the 13th consecutive month.

Commodity prices have surged recently and the price of oil is trading near $82 a barrel. Perhaps the major reason for the rise in commodities has been the U.S dollar. It has lost nearly 9% of its value in less than two months. While Wall Street is crying about deflation, the truth is you should be much more concerned about intractable inflation. The Fed has declared war upon savers and the value of the currency, so you should position your portfolio to hedge against the disappearing dollar.

Michael Pento

Euro Pacific Capital
Senior Economist/Vice President Managed Products <> <>

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