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Written by Administrator
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Monday, 11 March 2013 19:21 |
Gold has traded sideways for over a year between the initial impact of QE2 and the start of QE3&4. Short for Quantitative Easing, QE is the Federal Reserve's policy of printing currency in order to inflate away our problems. QE started as a reaction to the 2008 housing bubble burst and financial crisis, but has become a way of financing our ever-growing federal budget deficits while foreign interest in our Treasury Bonds wanes, especially with record low interest rates. But each iteration of QE is less and less potent than the last, like an addict becoming habituated to drugs. As a result, the Fed has had to inject this stimulus more frequently and in greater amounts. Operation Twist had virtually no effect, so QE3, which purchases $40 billion worth of mortgage-backed securities every month, was implemented with no upper limit, meaning it would continue until some impact is felt. Then, with the announcement of QE3 having almost no impact on the markets, the Fed followed up almost immediately with QE4, which directly purchases $45 billion worth of long-term Treasury bonds every month with no upper limit! This binge will push monetization to over $1 trillion per annum until the market decides to inflate a sufficient bubble with this extra liquidity such that unemployment falls below 6.5%.
But of course this assumes that the action actually produces the desired result. What if ongoing monetization continues destabilizing markets and sends unemployment higher? That's what has historically happened in highly inflationary environments. In that case, we'll have ongoing QE virtually forever. But not really forever, because eventually the markets will lose faith in the currency and it will collapse. But before that happens, even the highly manipulated CPI must indicate price inflation over the Fed's target of 2.5%, right?
Certainly that will be the case, but does that mean the Fed will stop printing? Not hardly. The federal government currently has a budget deficit of around $1 trillion per year and they go into convulsive fits over even the thought of restraining future increases let alone actually cutting spending! But foreigners have significantly slowed their purchases of Treasury debt, with our top foreign holder, China, actually selling over $100 billion since 2011. The Federal Reserve is now the top buyer of Treasuries, outpacing all foreign central banks combined. The past few years have seen other countries unpeg from the Dollar and resort to regional currencies for international trade instead of using a single reserve currency. In some cases, particularly those under U.S. embargo, they have moved to gold as the mode of trade.
Moreover, what will happen when the present bond bubble bursts? Treasuries are vastly over-owned by private investors following the big scare out of stocks in 2008. But now that many stocks are offering better yields than bonds and seem likely to continue to do so for the foreseeable future, especially once inflation expectations rise to meet reality, there will be a massive sell-off in bonds. And this will be especially true if the Fed lets interest rates increase even a little bit, which will trigger a decrease in bond prices. Normally, that would mean that interest rates would spike upward as people dump bonds at ever-decreasing prices. But not only would that be counter to current Fed policy, it would also bankrupt the U.S. government.
The Treasury currently spends around $250 billion per year on interest at an average rate of 2.2%. If rates rose merely to where they were 10 years ago at 5%, interest expenditures would more than double to over $500 billion per year. And if rates really took off, as they are wont to do during the popping of a bond bubble, they might reach the level they were in 1980 at near 14%, which would be a six-fold increase in interest payments, approaching $1.5 trillion per year! Obviously, since the government can't even pay its bills currently, this would all be in deficit, which means that the total deficit would climb to almost $2.5 trillion per year! And where would they get that money? They'd have to borrow it! From whom? The Federal Reserve! Obviously this would be quite the predicament, and should be avoided at all costs. Which means that the Fed would simply step in and buy all of the bonds being sold off by private investors, effectively monetizing a major chunk of the present national debt, upwards of $5 trillion. This may not seem as immediately bad as having to monetize $5 trillion every two years, but it will increase the monetary base by over 100% very quickly.
In other words, there's no way out for the Fed. They cannot cease QE in any politically acceptable way. Doing so would leave the government without the ability to fund its deficits and with interest payments exceeding the entire discretionary budget! It would also absolutely tank the economy which is currently floated on a zero interest rate policy. And that, of course, would bring forth calls for even more deficit spending as stimulus! Even if, miraculously, the unemployment rate fell to under 6.5%, it would still pop the bond bubble as people rush out of bonds and into stocks. So you could have the case where BOTH unemployment is under 6.5% and inflation is over 2.5%, and the Fed still won't be able to stop printing money! Tightening would mean bankrupting the government, which simply isn't politically feasible. We're at the point where we're monetizing our spending, which is the first step to hyperinflation. The only way out is austerity, and that's simply not going to happen here, as proven over the past several years of debt limit gum flapping.
What's worse is that the U.S. is far from alone in this predicament. Central banks the world over are monetizing their governments' spending and embarking on a world-wide competitive currency debasement! So we have few options for safe havens.
And so we must be resigned to much higher inflation and probably hyperinflation, not just here but globally, and that means that the number one inflation indicator, gold, is headed much higher. I highly recommend signing up for a BullionVault account right now and loading up on as much as you can afford in their Swiss vault. You will probably never ever see gold this cheap again and will kick yourself for not taking advantage of this opportunity. As this global financial collapse progresses and fiat currencies go down the proverbial drain, physical gold and silver in your possession or in a responsible vault in a safe jurisdiction will be your only insurance and protection. Even if you can't afford to invest in much right now, you can easily set up a monthly BullionVault savings plan to buy as little as a gram at a time. And every little bit helps.
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Last Updated ( Monday, 11 March 2013 23:39 )
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