Rising food and commodity prices have the world on edge.
Food prices are up 25% around the globe. Oil is nearing $100-a-barrel.Steel prices are expected to jump 66% this year. And, gold, well, that’s been on a tear for more a decade.
To fight inflationary fears, central banks around the world, with the notable exception of the U.S. Federal Reserve, have raised interest rates or suggested they might.
The European Central Bank signaled it could raise interest rates this year to quell inflationary pressure in the euro zone. Last week Brazil’s central bank raised interest rates half a percent. As for China, the country raised its rates twice in 2010 and is expected to do so again very soon.
Peter Schiff, President of Euro Pacific Capital has been sounding alarm bells on impending inflation for quite sometime. Now that it’s finally here, he tells Aaron rising prices have got nothing to do with the conventional wisdom the government would like you to believe.
From the weather, to speculators, to greedy corporations, inflation’s "got nothing to do with those factors” and everything to do with the money supply, says Schiff.
Inflation "is the consequence of what the government has done to try to stimulate the economy,” he says, referring to quantitative easing and stimulus spending. Basically, the Fed has had to print money in order to pay for this country’s huge deficits, which in turn has pushed up the price of just about everything priced in dollars, which remains the world's reserve currency.
If the weather's got nothing to do with it, what about the link between high economic growth and rising inflation? China's GDP grew at 9.8% in the fourth-quarter of 2010 and the country is dealing with inflation of roughly 5 percent.
Schiff doesn’t buy this argument either.
In fact, the opposite occurs, he says. “When economies are growing, they are growing their production, producing more goods and that puts downward pressure on prices.”
Brace Yourself
In the case of China, “the only way [it] can stop its inflation problem is to stop importing it from us, which means ... they have to let their currency rise,” Schiff says. As resistant as the Chinese have been to doing this, Schiff believes that they are slowly, but surely, starting to realize their economy could benefit from a stronger currency – more purchasing power and a greater standard of living.
If that happens, “the U.S. had better brace itself,” says Schiff. “It will unleash an inflationary nightmare here in the United States.”
"As the Chinese currency increases in strength, the dollar must decrease," he explains. "And, so Americans [would] experience higher prices, falling purchasing power and a lower standard of living.”
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