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We have long
expected further monetary easing by the U.S. central
bank . . . but this past Thursday’s news from the
Fed was more than most gold
investors could have imagined or hoped for.
In reaction to persistent
recession-like conditions
and continued high unemployment in the U.S. economy, the Fed is now
embarking on even more reflationary - and ultimately inflationary - monetary policies.
In a statement following Thursday’s Federal Open Market Committee
(FOMC) meeting, the Fed said “If the outlook
for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed
securities, undertake
additional asset purchases,
and employ its other policy
tools as appropriate until such improvement is achieved in the context of price
stability.”
More specifically, the Fed said it
will buy $40 billion of mortgage-related debt each and
every month until the outlook
for employment improves significantly. At the same time, the Fed will continue its “Operation
Twist” program in which
it sells short-term securities and buys longer-term
Treasury debt. And, in addition, the Fed stated it
is unlikely to raise interest
rates from their current near-zero levels at least until mid-2015.
The Fed’s newly adopted quantitative easing (QE3),
unlike QE1 and QE2, is open-ended and unlimited. It will continue until there is
evidence of healthy employment market conditions - which could be
years away. And, it may
include other policy tools that remain undefined.
All of this is
meant to lower mortgage interest rates, stimulate the housing and construction
sector, raise prices of existing
homes, keep Wall Street’s bull market in tact, and thereby reinvigorate
the economy.
So far, gold and
silver have been big beneficiaries
with big price gains after QE1 and QE2, and now rising in the week before
the FOMC meeting in anticipation of more stimulative monetary policies . . . and then, after the announcement, reacting to the
even-more aggressive monetary
stimulus than even the most
liberal observers had expected.
But will these unprecedented Fed policies juice the economy,
create jobs, and lower unemployment
anytime soon? I think not. The real problem is not too little monetary creation . . . or too high interest rates . . . but the unprecedented levels of household and public-sector debt . . . along with extreme anxiety, uncertainty, and fear - in part, arising from Washington’s inability to formulate appropriate fiscal policies.
Even with all this newly created liquidity available for bank lending
or sloshing around the financial
and commodity markets, lending is not picking up because too
many households and businesses are simply considered
poor credit risks.
U.S. Treasury
debt has already reached such high levels (in proportion to nominal GDP) that last summer the Standard & Poor’s credit-rating agency lowered America’s credit-worthiness
. . . and recently another credit-rating agency, Moody’s, has warned it
too will lower our rating if
America continues running Federal budget deficits without any long-term measures in place to bring down the nation’s indebtedness.
Instead of dealing
pro-actively to put our house
in order, America faces the so-called “fiscal cliff” with extreme and automatic Federal spending cuts and tax increases
set to take affect at
yearend - unless Congress and the Administration can come to some
compromise, something that they have
not been able to accomplish in recent years.
Many of the
Fed’s critics claim that its
recent and prospective monetary policies will be ineffective and inflationary. I believe these policies will be effective - eventually - simply because they are inflationary . . . and I believe that Fed Chairman Bernanke knows this as well
as, if not better than, his critics.
Through inflation - which is simply the
devaluation or debasement of the U.S. dollar brought about by excessive growth in the supply of dollars
- the Fed will bring the country’s debt-to-GDP ratio
back down to manageable levels, levels at which the
economy will be able to once
again function properly.
But America’s current economic predicament was years, if not decades, in the making - and it will be years
before we can once again
enjoy a healthy economy with adequate employment growth and rising
prosperity.
In the meantime, we can expect
continued accommodative monetary policies from the Fed
- with gold prices rising to record heights
far above recent levels.
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