The cost of bailouts

March 8, 2011 04:26 PM

In our November 2008 cover story, “Great bailout of 2008:What’s next" — the first issue published following the 2008 Lehman Brother’s collapse and TARP — we discussed the cause and ramifications of the “Great Bailout.” One source, Bud Conrad of Casey Research, pointed out the bailout was tragically flawed and said it would lead to inflation and a devaluation of the dollar. I know nothing earth shattering there, but wait, here is the important part. Conrad added the devaluation would not occur in relation to other currencies, which are also in trouble but in purchasing power of commodities like petroleum and gold.

 Get it. Fiat money is being devalued vs. commodities. Remember that next time you here someone railing against speculators or hear some politician talking about getting tough on those folks pushing up the price of oil.

Conrad is not the only one making this point. Murray Ruggiero noted the same phenomena in a two-part series in March and May of 2009. If all currencies are weak there will not be a dramatic drop in value as they are traded against each other but they will lose value against gold. And what has become apparent and talked about by Phil Flynn and several others including Jim Rogers, is that crude oil has become the new gold in terms of being a store of value.

The Federal Reserve would have us believe that they can print money (quantitative easing) and it will not have a great affect on inflation. I guess they can keep saying there is no inflation as well. But our massive debt is a huge problem and finding scapegoats is not the long-term solution. As we noted here, what is going on now has been foretold by many. When you lower the value of money by creating it out of thin air, its value diminishes. It is that simple.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.