are new reports that the Federal Reserve is planning to inject more cash into
the ailing economy though another round of Quantitative Easing (QE3). You
have read in these pages before that More
QE is on the Way (1-22-13, The Gold Speculator). The new bond-buying
program would be “sanitized” by coincident selling of short-term
instruments in an effort to control increased inflation that would result
from the addition of another $1 Trillion or so to the money supply. This
approach is not new; the ECB has used large, “sanitized” bond
purchases over the last year in its attempt to stimulate the Eurozone economy
and provide bailout funds to ailing European banks.
bond-buying program would be the third attempt to jumpstart the US economy
through aggressive monetary policy. The previous cash injections added $2.3
Trillion to the Fed’s balance sheet. The results of Fed stimulus
efforts have been underwhelming. US unemployment has actually increased since
QE1 was implemented in 2009 and the larger QE2 in 2010. Today, the US Labor
Department, Bureau of Labor Statistics reports US unemployment at 15.1%
(U-6), up from 14.1% in January 2009. And GDP continues to limp along at 1%
to 3% since QE2 went into effect.
Freidman instructs us that “Inflation is always and everywhere a
monetary phenomenon in the sense that it is and can be produced only by a
more rapid increase in the quantity of money than in output.” (The Counter-Revolution
in Monetary Theory, 1970). The Fed policy of extended accommodation has
increased the money supply (M2 measure) to $9.8 Trillion. M2 includes demand
deposits (M1) plus small time deposits, money market funds and the like. M2
is considered money available to the transactional economy. These levels are
unprecedented, and we can see supply has increased almost $1 Trillion in the
last twelve months.
reports inflation is modest at 2.0%. But as anyone who buys food or fuel
knows, prices for everyday goods have increased by multiples since the Fed
first implemented Quantitative Easing. The problem is the growth of the money
supply greatly outstrips the growth in output, the sum of all production of
goods and services. When more money chases the same amount of goods, prices
We can see the rise in prices in the
rise in the CRB commodity index. Higher commodity prices, particularly
oil-based energy products, dampen economic activity, and slow economic
growth. This is another example of Bastiat’s
“unseen” effects. The Fed’s policy, in fact all government
intervention, is counterproductive to true economic growth. So as more and
more poor economic data emerges, it is no wonder that the Fed is now
preparing to revert once again to the only tool in its “stimulus”
tool bag: additional Quantitative Easing (QE3).
With every new Dollar the Fed prints, the value of each Dollar in your wallet declines.
And the price of any commodity priced in Dollars increases. We can see that
dynamic play out in the CRB index, and in particular, the price of oil.
Certainly there is a “war” premium priced into oil, as Iran
threatens to close the Strait of Hormuz. But the more fundamental reason for
high oil prices over the last few years has been the decline of the Dollar.
After all, the Iranian threat to oil transportation in the Persian Gulf has
only recently resurfaced.
But some say that the US does not rely
on imports of Iranian oil. Well, we do feel the effect of the Iranian war
premium. Oil is traded in the global market, and oil is fungible. That is, a
barrel of oil from Saudi Arabia can be substituted for barrel of similar
quality oil from Iran or Venezuela at the same market price. Because the US
is a net importer of oil, we pay the global price. Unfortunately we are likely
to be a net importer for some decades yet.
We can see the inverse relationship of
oil (WTI) to the value of the Dollar in the chart below.
WTI has jumped from $95 bbl to over $110 bbl as the
Dollar dipped from 82 to 78. Gasoline prices have jumped in turn, to over
$4.00/ gal in some states. Higher energy and transportation costs eventually
find their way into the prices of most consumer products, acting as a tax on
the consumer. This causes many consumers to pull in their horns and puts a
damper on consumer demand which slows economic activity. Higher oil and
gasoline prices are additional examples of the unintended consequences of the
Fed’s ultra-accommodative monetary policy.
Stealthy QE3 would pump up the stock
market, particularly bank stocks. But QE3 would also mean higher prices in
general. QE3 would further debase the Dollar and reduce purchasing power. QE3
means more inflation. QE3 means there is more reason to guard against
inflation and artificially inflated assets. QE3 means higher gold and silver
prices. To the prudent investor, QE3 means buy more gold and silver. The way
to preserve wealth is to own and hold sound money.
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