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Puplava on Financial Illusions

05/09/2004

Analyst Jim Puplava has recently published Illusions, an essay on the coming financial storm. Puplava's view is that the widespread consensus that the Fed will embark on a rate-tightening cycle is mistaken. The financial markets have in essence become addicted to easy credit and low interest rates. Excessive amounts of debt have been funded by money creation at these low rates, and an increase in rates would be devastating to financial institutions, the mortgage market, and the GSEs. Instead, Puplava argues, we are headed toward a hyper-inflationary currency collapse as the FEd tries to monetize the debt in an effort to avoid a debt-defaulting domino chain collapse.

As long as the present fiat money system exists without the backing of gold or silver, governments and their respective central banks will continue to spend more money than they take in. What they can’t politically finance through higher taxes, they will finance through credit or by printing money. This means we will experience inflation somewhere in the economy or the financial markets. Indeed as Mr. Bernanke has reminded us on numerous occasions, the central bank can print unlimited amounts of money, use other extraordinary measures, or intervene directly in the financial markets to prop up asset prices—be that bonds, stocks, mortgages, or real estate.

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