The Fed made history today by announcing an open-ended money
printing policy - a policy heretofore unseen outside of history's
hyperinflation havens. The news conference that followed the
announcement revealed a central bank acting out of extreme
desperation.
While the Fed is doing another round of quantitative easing, QE3
is not the same as QE2. The previous QE involved the purchase of
U.S. Treasuries. This time around, the Fed is buying MBSs
(NYSEARCA:MBB) (mortgage-backed securities). In QE1, various
types of securities were bought. The previous QEs also had specific
limits to the amount of money that was going to be printed whereas
QE3 doesn't. QE3 is supposed to be ongoing until somewhat after the
economy and employment situation have been improving for a while.
How long that will be is anybody's guess.
Despite several questions in the press conference that followed
the announcement, Bernanke made only vague statements about how the
Fed would determine when enough money printing was enough. The
purchase of mortgage-backed securities is likely to continue for
some time because doing so is supposed to reduce unemployment. How
that will work is not clear other than perhaps reducing
unemployment in the construction industry. The Fed's actions should
lower already historically low mortgage rates and Bernanke
specifically stated more than once that getting the price of homes
up was one of his major goals (he seems to have forgotten that the
global financial collapse in 2008 was the result of the collapse of
the housing bubble).
Anticipating the obvious objections, Bernanke tried to head off
the major criticisms of the Fed's new plan at the beginning of his
news conference. While he admitted that the Fed's action hurt
savers and would make it difficult to prepare for retirement, he
said that if you don't have a job you wouldn't have any money to
save anyway. So, apparently the large majority of people who have a
job should risk having their retirement unfunded in order to pursue
Bernanke's high risk policies that have been tried for the last
five years, but haven't worked. I wouldn't have been surprised if a
couple of retired people were brought up to the podium and Bernanke
kicked them a few times to emphasize his point.
Bernanke also denied that the new round of money printing will
cause inflation. The basis of his argument was that the members of
the FOMC aren't prediction inflation in their projections, so
obviously it's not going to happen (these are the same people that
failed to foresee the subprime crisis coming). Also Bernanke
claimed inflation has been around 2% for years, so there is no
problem. Even a casual perusal of commodity prices since 2009 shows
increases of 100%, 150%, 200% and sometimes more however. It is
true the government isn't reporting inflation, but that isn't the
same as it doesn't exist. The head of the Weimar German central
bank also claimed inflation wasn't a problem as he printed more and
more money. Eventually, inflation reached 300 million percent.
One of the real eye-openers of the Bernanke news conference was
his admitting the impotency of the Fed and monetary policy. Over
and over again Bernanke stated that the Fed's actions were, "not a
panacea". He said that, "We [the Fed] can't solve the problems by
ourselves". He also emphasized that the Fed's, "tools are not so
powerful that they can solve the problem". If the chances of
success are so limited, why is the Fed taking a course of action
that could have serious negative consequences for the American
people?
In addition to his desire to reinflate the housing bubble,
Bernanke was also proud that when the Fed speaks, economic
forecasters change their numbers and that, "markets respond to [the
Fed's] guidance". This was a blatant admission that the Fed
purposely manipulates the stock and bond markets and financial
news. Obviously, this destruction of free market mechanisms is not
something that he considers shameful, even though this represents a
major power grab on the part of the Fed.
Bernanke was much more coy however when the question of whether
or not the Fed's money printing decision was base on political
considerations. One reporter mentioned that Romney was not planning
on reappointing Bernanke and asked if the policy shift was an
attempt to help reelect President Obama. Bernanke denied this of
course, his voice almost breaking when he stammered out, "our
decisions are based entirely on the state of the economy." I must
admit that I am personally surprised that the Fed did this before
the election because this question is only going to be the
beginning and the Fed has now made itself an ongoing issue in the
presidential campaign. I didn't think Bernanke was so foolish to
take this risk, but obviously I overestimated his political
awareness.
Earlier this month, ECB head Mario Draghi promised unlimited
bond buying. This is different from what the Fed is doing because
those purchases are supposed to be sterilized (new liquidity put in
is neutralized by liquidity being removed). Many people however
believe that the ECB will have to engage in money printing despite
its claims. Added to the Fed, this means inflation investments will
have a bid under them for some time to come. Investors should be
looking at gold and silver, energy and agriculture. Ironically,
shorting Treasury bonds also look like a good bet now as well,
since the Fed is not buying them as part of its QE program
(Operation Twist though will be going on to the end of 2012 however
and this acts to lower interest rates around the 7 to 10-year
maturity level so be careful). Keep buying as long as the Fed keeps
printing.
Daryl Montgomery is the Author of "Inflation Investing - A Guide
for the 2010s" and Organizer,
New York
Investing Meetup
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