If no one
seems to care that the Titanic is filling with water, why not drill another
hole in it? That seems to be the M.O. of the Bernanke Federal Reserve. After
the announcement of QE3 (also dubbed "QE Infinity") created yet
another round of media chatter about a recovery, the Fed's Open Market
Committee has decided to push infinity a little bit further. The latest move
involves the rolling over of long-term Treasuries purchased as part of
Operation Twist, thereby more than doubling QE3 to a monthly influx of $85
billion in phony money starting in December. I call it "QE3 Plus" -
now with more inflation!
Inflation By Any Other Name
In case you've lost track of all the different ways the Fed has connived to
distort the economy, here's a refresher on Operation Twist: the Fed sells
Treasury notes with maturity dates of three years or less, and uses the cash
to buy long-term Treasury bonds. This "twisting" of its portfolio
is supposed to bring down long-term interest rates to make the US economy
appear stronger and inflation appear lower than is
actually the case.
The Fed claims operation twist is inflation-neutral as the size of its
balance sheet remains constant. However, the process continues to send false
signals to market participants, who can now borrow more cheaply to fund
long-term projects for which there is no legitimate support. I said it last
year when Operation Twist was announced, and I'll continue to say it: low
interests rates are part of the problem, not the solution.
Interventions Are Never Neutral
Just as the Fed used its interest-rate-fixing power to make dot-coms and then
housing appear to be viable long-term investments, they are now using QE3
Plus to conceal the fiscal cliff facing the US government in the near future.
As the Fed extends the average maturity of its portfolio, it is locking in
the inflation created in the wake of the '08 credit crisis. Back then, we
were promised that the Fed would unwind this new cash infusion when the time
was right. Longer maturities lower the quality and liquidity of the Fed's
balance sheet, making the promised "soft landing" that much harder
cannot keep printing indefinitely without consumer prices going wild. In many
ways, this has already begun. Take a look at the gas pump or the cost of a
hamburger. If the Fed ever hopes to control these prices, the day will
inevitably come when the Fed needs to sell its portfolio of long-term bonds.
While short-term paper can be easily sold or even allowed to mature even in
tough economic conditions, long-term bonds will have to be sold at a steep
discount, which will have devastating effects across the yield curve.
It won't be an even trade of slightly lower interest rates now for slightly
higher rates in the future. Meanwhile, in the intervening time, the
government and private sectors will have made a bunch of additional wasteful
spending. When are Bernanke & Co. going to
decide is the right time to prove that the United States is fundamentally
insolvent? Clearly this plan lays down an even stronger incentive to continue
suppressing interest rates until a mega-crisis forces
interest rates rise - the increase made even sharper by the Fed's selling -
the Fed will incur huge losses on its portfolio, which, thanks to a new
federal law, will become a direct obligation of the US Treasury, i.e. you,
the Fed refuses to accept this reality. Even though a painful correction is
necessary, nobody in power wants it to happen while they're in the driver's
seat. So Bernanke will stick with his well-rehearsed lines: the money will
flow until there is "substantial improvement" in unemployment.
Does Bernanke Even Believe It?
Even Bernanke must have a hunch that there isn't going to be any
"substantial improvement" in the near term. I suggested before QE3
was announced that a new round of stimulus might be Bernanke's way of
securing his job, but recent speculation is that he may step down when his
current term as Fed Chairman expires. Perhaps he is cleverer than I thought.
He'll be leaving a brick on the accelerator of an economy careening towards a
fiscal cliff, and bailing before it goes over the edge. Whoever takes his
place will have to pick up the pieces and accept the blame for the crisis
that Bernanke and his predecessor inflamed.
Don't Gamble Your Savings on Politics
For investors looking to find a safe haven for their money, QE3 Plus is a
strong signal that the price of gold and silver are a long way from their
peaks. Gold hit an eleven-month high at the beginning of October after the
announcement of QE3, but the response to the Fed's latest meeting was
lackluster. When the Fed officially announces its commitment to QE3 Plus in
December, I wouldn't be surprised to see a much bigger rally. For that
matter, many are keeping an eye on the election outcome before making a move
on precious metals.
However, seasoned readers of my
commentary know that short-term trends are not a good reason to invest in
physical precious metals. QE3 Plus can only boost the confidence of anyone
intent on the long-term protection of wealth through hard assets. No matter
who takes office in January, Helicopter Ben Bernanke will continue on the
path of dollar devaluation until there is a flight of confidence from the
Peter Schiff is the CEO
and Chief Global Strategist of Euro Pacific Capital, best-selling author and
host of syndicated Peter Schiff Show.
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