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Last
week the US Federal Reserve surprised yet again by announcing QE 4: a program
through which it would purchase $45 billion of US Treasuries every month.
Between
this program and the Fed’s QE 3 Program announced in September, the Fed
will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion
worth of Mortgage Backed Securities) ad infinitum.
Indeed,
the Fed’s new policies are anchored to its goal of getting employment
down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.
First
and foremost, QE does not create jobs. The UK has announced QE efforts equal
to an amount greater than 20% of its GDP and has not seen any meaningful job
growth. Similarly, Japan has announced nine rounds of QE for a combined
effort equal to 20% of its GDP over the last 20 years and job growth remains
dismal there.
Based
on this, the Fed’s decision to anchor its QE efforts to employment is a
bit hard to swallow. Instead, it’s much more likely that the Fed sees
something “bad” coming down the pike and is moving preemptively
to shore up the system again.
Indeed, while most analysts claim the
Fed has been printing money day and night, the truth is that the Fed’s
balance sheet didn’t budge much at all for most of 2012. Indeed, as late
as mid-October the Fed balance sheet was actually $50 billion smaller than it
was the year before.
Then QE 3 and QE 4 came along and the
Fed balance skyrocketed from $2.8 trillion to over $2.9 trillion in a matter
of weeks. And it will be expanding at a pace of $85 billion per month going
forward.
Among other things, this is going to
result in higher inflation, greater civil unrest worldwide, and a shortage of
high-grade collateral in the financial system.
Moreover, the Fed is well past the point
of being able to ever exit this situation cleanly. By its own admission, the
primary driver of the stock market has been the hope of Fed intervention. If
one day the Fed actually tries to pull out its market props, let alone unwind
its balance sheet (which will be north of $3 trillion in size in early 2013)
the stock market and the system would not be able to withstand it.
This is the game going forward. The Fed
is playing an increasingly dangerous game by making up policies as it goes.
And there is no real indication that it has any idea how to exit this
situation cleanly.
But two things are certain: costs will
be going up… and these policies will work… until they
don’t… at which point things will be extremely ugly.
On that note, we’ve recently
published a Special Report detailing how to prepare for inflation: what
investments will profit most from it and why it’s only going to be
getting worse going forward.
Graham Summers
For
more insights as well as a FREE Special Report outlining how inflation will
tear through the financial system... visit us at:
http://gainspainscapital.com/gpc-inflation/
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