Thursday, July 30, 2009

Inflation or Hyperinflation?

Thoughts from Axel Merk of the Merk Hard Currency Fund (MERKX)and Merk Asian Currency Fund (MEAFX).

Nothing during the financial crisis seems to have worked as planned by the Fed. Policies have been far more expensive as the Fed’s credibility has eroded. The Fed has repeatedly shown that it completely underestimates the political dimensions of its policies. Will the market really buy its tough talk? And if not, what will happen? If the Fed substantially increases its market interference, it can lead to hyperinflation down the road. How likely? We are reluctant to quantify it, but the risk is real. The appropriate way for the Fed to regain credibility may be to not only announce that there is a viable exit strategy to the policies that have been pursued, but to embark on it. So far, this hasn’t happened, the printing press continues to be very active with the Fed’s balance sheet growing steadily. We hope the balloon won’t pop, but hope is not a strategy.