Compose a 2-4 page report, single-spaced, on the following topic. Be sure to ill

Question

Compose a 2-4 page report, single-spaced, on the following topic. Be sure to illustrate your report with relevant financial numbers and data, and to explain the significance of this data.

BACKGROUND INFORMATION: During the Carter administration, long-term US Treasury yields exceeded 15%, and short-term T-Bills yielded near 20%. After Reagan's inauguration, interest rates began to fall as Fed Chairman Volcker's restrictive monetary policy succeeded in containing inflation. Over the past 25 years, US rates have steadily declined: T-Bills are hovering under 1% and the long bond is yielding about 4%.

Lately, though, rising oil prices have incited inflationary forces. China and other developing nations have increased their consumption for oil, metals, materials, and food. Thus, both foreign and domestic factors have spurred demand and are contributing to rising prices on a global scale. In addition to this commodity-induced inflation, US consumers are faced with rising costs for essential services such as healthcare and education.

The Chairman of the Federal Reserve, Ben Bernanke, is faced with a dilemma. Should the Fed increase rates to contain inflation; or, should the Fed keep rates very low to spur the US economy which is beset by a collapse in home values, an extensive banking crisis, and a faltering stock market?

Explanation / Answer

There are so many gold bugs that talk about the fall of the dollar. But in a deflationary credit contraction, the dollar actually rises along with treasuries as the “safe haven.” Dollars still represent an asset. The dollar index, made up of 57% the Euro and 13% the Yen, has 70% of it countered by lousy economies that are sure to decline putting pressure on their own currencies to perform. By default, the U.S. dollar will benefit. There will be an eventual rise in the price of gold with all currencies. All currencies are on a ship with the U.S. dollar on one side and the Euro, Pound and Yen on the other. They run from one side of the ship to the other where sometimes the dollar is higher and sometimes the other currencies, all trying to stay afloat. Unfortunately the ship is called the Titanic when compared to gold and all of those currencies will be chasing the gold and silver lifeboats at some point. I have been saying that while the U.S. dollar gains strength, primarily against the Euro, it could have some pressure on gold and silver. The dollar index is now past 81 and moving towards the 88,89 level while the Euro moves down to its lows of around 117,118. I do see these levels reached in 2012.

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