February 14, 2012
BY: Robert Hallberg, Topics: Fed, QE, Gold
The Federal Reserve recently announced that they will keep the federal funds rate at 0 to ¼ percent at least through late 2014, and target inflation at 2%. This is not exactly the same as quantitative easing or outright monetization, but it is a form of easing and it could affect more rates than just short term rates.
Furthermore, the Fed suggested that the option of quantitative easing (QE) still remains on the table and I would imagine that QEIII in one form or another will be implemented by the slightest sign of weakness in the economy.
This year is an election year, not only in the US but in more than 50 other countries throughout the world, and we should expect the powers that be to use whatever methods available to hold the system together, at least until after the election. Zero percent interest rates may not do a whole lot for the economy, except for maybe giving it the appearance of growth and a boost in the stock market.
The chart of the central bankâs balance sheets shows which countries are engaged in money printing. The Fedâs balance sheet has remained stable for the second half of last year, with a minor increase when they opened up the swap lines with Europe, but the ECBâs balance sheet has increased rapidly in their effort to bailout Greece.
The next chart shows the ECBâs balance sheet which has increased dramatically by them trying to bailout the PIIGS nations.
The bank of Japan has also been expanding its balance sheet, but as opposed to the ECB and the Fed who aggressively started their bond purchasing programs after the panic of 2008, Japan has engaged in this type of activities for well over a decade and is in much worse shape consequently.
The problem with money printing and ultra low interest rates is that the undesirable effects of inflation occurs with a time lag, making it difficult to know when itâs gone too far. Central banks can only measure the effects after the fact, and by then it well may be too late. The dollar and all other fiat currencies are not backed by anything other than confidence and empty promises. If this confidence is lost it cannot easily be regained.
Furthermore, inflation usually does not increase across the board. The Fed can print money but they cannot control where this money goes. When the Fed and ECB print money it typically flows into specific asset classes and cause unintended consequences. For example, in 2010 and 2011 we saw a dramatic increases in soft commodities such as rise and cotton among other things as hot money flowed into these sectors; causing riots and unrest across the world as food prices were rising in underdeveloped countries.
No one knows for sure which asset class the hot money from next round of stimulus will go to. So far gold has just kept up with inflation but it is highly likely that the next big bubble will be in gold and precious metals. The chart shows goldâs price along with the Feds balance sheet.
It remains to be seen which asset class the Fed and the ECB will manage to inflate this year but as a precaution I urge investors to invest in precious metals to hedge against inflation.
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