The Great Debate–Puru Saxena Explains the Fed’s Interest Rate Hikes

Don’t miss the article titled The Great Debate by Puru Saxena which recently ran in The Daily Reckoning. In it, Saxena refutes the widespread belief is that the Federal Reserve is currently increasing interest-rates to “control” inflation. Here is an excerpt from his excellent article:

“The grim reality is that the modern day central banking IS inflation…and the quicker we get used to this idea, the better. The deflation scare is nothing more than a decoy, which the central banks use in order to continue with their money-printing (inflationary) program.
Still not convinced? Then, consider the greatest fabrication, the Japanese “deflation” scare.  For years now, we have been told repeatedly that the root cause of Japan’s economic problems is deflation. We have been forced into thinking that deflation is the culprit. Allow me to share a secret – the central banks want you to believe that deflation is a total disaster so that they can freely print more money, thereby creating inflation. After all, who benefits from the monetization of the economy?
Despite all the brainwashing, close inspection reveals that Japan never really had any deflation! The truth is that throughout the past 15 years, Japan’s money supply has continued to grow (inflation). Japan has witnessed inflation, and not deflation, since 1980. Sure, Japanese asset prices have fallen since 1990, but the cause is not deflation, as advertised by the establishment. In fact, a sharp rise in interest-rates was the trigger, which caused the Japanese stock and property bubbles to burst.

These days, we are being told that the Federal Reserve is raising interest-rates to “control” inflation. If the Federal Reserve were really curbing inflation, why would the American money supply continue to surge despite recent interest-rate hikes? Despite all the noise about inflation, the Federal Reserve has added roughly $1 trillion to the system over the last year. So, on one hand, the Federal Reserve continues to inflate, and on the other hand, it is raising rates. “But why would they do that?” you may ask. You see, the U.S. economy is in a mess, and a true contraction in the money supply (deflation) would send the whole world into a severe recession. Under this scenario, millions of companies and individuals would go bust and the entire financial system may collapse. Therefore, you can rest assured that the Federal Reserve will continue to inflate for as long as possible. It is shocking to note that the broad-based money supply (M3) has increased from $ 6.5 trillion to $10 trillion in five years – representing a 54% increase! Yeah, Greenspan did a fine job “managing” inflation!

As far as the current situation is concerned, I believe the Federal Reserve is raising interest-rates to prevent an outright collapse of the U.S. dollar…”

Visit The Daily Reckoning web site to read the rest of Mr. Saxena’s article. If you do not yet already subscribe to The Daily Reckoning (a free e-mail subscription), then I highly recommend it.


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