About a month ago many of you might remember Ben Bernanke being widely quoted as saying that the economy is well on the way to recovery. I scratched my head at this because it made almost no sense to me at all then. Unemployment is still at 9.7% with no expected dip in those numbers any time soon. Outside of a small blip in auto sales thanks to an artificial government program that probably ruined demand for the next 6 months at least, durable goods orders are down. The real estate market is still in shambles and no where close to recovering from the devastating hit it has taken. So, why in the world would the Fed chairman say something like this.

Then today I read this story and it was all crystal clear to me; they are just preparing us for large interest rate raises because they are freaking out about large scale inflation which is heading directly for us. Notice in this article that Fed Reserve member Richard Fisher says:

“I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity.”

and

Charles Plosser, president of the Federal Reserve Bank of Philadelphia and also a hawk against inflation, waded into the debate in a speech Tuesday in Easton, Pa., saying the Fed may need to act “well before” unemployment — now at a 26-year high of 9.7 percent — returns to normal. The Fed, he said, will need to be on guard “to prevent the Second Great Inflation.”

In other words they are going to be raising interest rates, regardless of whether the economy is actually in recovery or not, and this is going to be their cover. You see, one of the basic rules of economics is that when you have a lot of debt (like the U.S. does) and you are running a large deficit (like the U.S. is) then loaning money to you becomes increasingly risky. So, in order to hedge that risk you raise interest rates. If you don’t, or if the Fed and Treasury decides to simply monetize the debt (which they are already doing, read this article for more), the natural and inevitable result will be large and fast inflation. The Federal Reserve knows this as well as we do, and they know that one way to fight this is going to be raising interest rates.

From the above article it is almost a certainty that the Fed will be doing this regardless of whether we are actually in a recovery or not. They are just going to do it . . . period. So, what happens when they raise interest rates when we are not in an actual recovery? Well, let’s just say it’s not going to help the job market any. I hate to sound like Chicken Little, but if I were you, I’d just keep your eye on the sky. Also, buying gold might make sense right about now too.