To QE or not to QE. That is the
question. The markets waited for the Fed Chairman to announce it is time to
jump in with another round of restorative stimulus, and had bid up nicely before
Big Ben disappointed once again at the conclusion of last week’s FOMC
“The Committee will closely
monitor incoming information on economic and financial developments and will
provide additional accommodation as needed to promote a stronger economic
recovery and sustained improvement in labor market conditions in a context of
Hardly stimulating. The markets
responded by selling off, but not as sharply as usual following a Bernanke
punt. Traders held out hope that the ECB might do something bold. But alas,
Mario Draghi seemed content to sit on the edge of
the bed as well. Apparently, now is not the time for the central banks to
begin a new bond-buying binge. The bankers must have insight other do not.
Could it be that that they expect economic conditions to deteriorate further,
or do they see signs of a sudden turnaround? Most analysts are pessimistic on
the prospect that the Eurozone debt crisis can be contained. And many do not
see the US recovery happening until a pro-growth president takes the oath of
The reason that the Fed policy has
failed to stimulate the US economy is that monetary policy cannot stimulate
demand. And despite what the Keynesians in charge of Washington believe,
government spending does not create demand (except, or course for defense
spending). Even if I accept the Keynesian approach, then also I must believe
that the US is in JMK’s liquidity trap, that eerie nether region of
extended ultra-low interest rates in which no amount of additional money
produces any increase in output. Uncle Ben must secretly know that QE3 would
ultimately fail, as did QE1 and QE2. And so too, his legacy as an effective
Fed Chairman would never materialize.
One example of the failure of Washington
central planning policy is the unemployment rate, which has now reached 15%
(U-6 rate) for July. We have not had so many out-of-work citizens since the
1930’s. If defense funding sequestration occurs, there will be another
700,000 or so joining the jobless ranks. Despite what some may say, the
private sector is not “doing fine”.
The US stock market seems to have
discounted the feckless Fed, re-election campaign rhetoric, and the lousy
July jobs number to closing above 13,000 last week and continuing its move up
this week. The markets seem propelled by some special knowledge that there
may be a bridge across the fiscal cliff. Could reason and responsibility
succeed where rhetoric and redistribution has failed? We shall see. In the
meantime, individuals must remain vigilant and protect themselves against
attack by those who would steal their wealth and give it to others more
“deserving”. Да, Comrade!
Many know that buying and owning gold is
an excellent way of protecting wealth. Gold has been a recognized store of
value for thousands of years. Gold has intrinsic value. Gold maintains its
value especially in uncertain economic times. The price of gold increases
when governments intervene in the credit markets and create more fiat
currency than economies demand. This has been the case in the US and the EU
for the last several years as central bankers have tripled the money supply
through Quantitative Easing and other easy money measures.
Over the past five years, US central
planners have distributed more than $4 Trillion of stimulus funding, raising
the government share of GDP to 42.3% in 2009 from 35% in late 2007. The
Federal spending binge includes add-ons to the agricultural and housing bills
in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and
Freddie Mac bailouts, "Cash for Clunkers," additional mortgage
relief subsidies and the president’s $860 billion stimulus plan that
promised to deliver unemployment rates below 6% by now.
Since the beginning of the Federal
stimulus spending spree, US GDP has fallen 61% and the price of gold has
increased 101%. The price of gold is likely to climb higher if Chairman
Bernanke ignores his better angels and succumbs to another sip from the
And the price of gold is telling us now
that odds are good that the Chairman will fall off the wagon, again, soon.
Today, gold is trading above $1600/oz.
There are signs that gold will continue
its upward trend for some time yet. Technical indicators for commodities in
general are bullish. The CRB index is in an upward swing, climbing to 12% to
over 561 since June. Many noted commodity traders are adding to their long
positions. In particular, large speculators (the smart money) are
accumulating gold. In the most recent Commitment of Traders (COT) report,
Large Speculator bullish sentiment jumped 3 points to 79%. The large traders
added 5,246 new long contracts and shed 7, 841 short positions on slightly
lower open interest of 403,403 contracts. These professional
traders are usually ahead
of the herd.
What will happen to the price of gold if
Helicopter Ben does not dump more bushels of greenbacks from the sky? Well,
the price of gold will still rise. A major reason is the fact that money is
seeping in to the economy from a massive store held as “excess
reserves” by member banks of the Federal Reserve system. These funds
are released into the economy when the banks lend or create new demand
accounts. Normally, adding money into circulation stimulates economic
activity. But we also know that increasing the supply of money when the
demand for money is low, as is the case today at 1.5% GDP growth, leads to
Of course, a new round of Fed
bond-buying would be a massive dose; the last two rounds were woefully
inadequate, according to the Keynesians in charge. “If only the
stimulus were larger, say $1.5 Trillion or so, we would have come out of the
woods by now.” Or, maybe $3 Trillion, as Paul Krugman
Here’s an idea that might work.
Take Paul Krugman’s $3Trillion number and
rather than spending it on shovel-ready stimulus programs, spend it all on
running the Federal government for a year, and declare a 1-year tax holiday
for all US citizens and all US businesses. Now that would jump start the
economy and end the jobless recession.
consummation devoutly to be wished.