Last week the US Federal Reserve surprised yet again by announcing QE 4: a program through which it would purchase $45 billion of US Treasuries every month.
Between this program and the Fed’s QE 3 Program announced in September, the Fed will be monetizing $85 billion worth of assets every month ($40 billion worth of Treasuries and $45 billion worth of Mortgage Backed Securities) ad infinitum.
Indeed, the Fed’s new policies are anchored to its goal of getting employment down to 6.5%. This means the Fed will buy these assets non-stop until employment gets down to 6.5%.
First and foremost, QE does not create jobs. The UK has announced QE efforts equal to an amount greater than 20% of its GDP and has not seen any meaningful job growth. Similarly, Japan has announced nine rounds of QE for a combined effort equal to 20% of its GDP over the last 20 years and job growth remains dismal there.
Based on this, the Fed’s decision to anchor its QE efforts to employment is a bit hard to swallow. Instead, it’s much more likely that the Fed sees something “bad” coming down the pike and is moving preemptively to shore up the system again.
Indeed, while most analysts claim the Fed has been printing money day and night, the truth is that the Fed’s balance sheet didn’t budge much at all for most of 2012. Indeed, as late as mid-October the Fed balance sheet was actually $50 billion smaller than it was the year before.
Then QE 3 and QE 4 came along and the Fed balance skyrocketed from $2.8 trillion to over $2.9 trillion in a matter of weeks. And it will be expanding at a pace of $85 billion per month going forward.
Among other things, this is going to result in higher inflation, greater civil unrest worldwide, and a shortage of high-grade collateral in the financial system.
Moreover, the Fed is well past the point of being able to ever exit this situation cleanly. By its own admission, the primary driver of the stock market has been the hope of Fed intervention. If one day the Fed actually tries to pull out its market props, let alone unwind its balance sheet (which will be north of $3 trillion in size in early 2013) the stock market and the system would not be able to withstand it.
This is the game going forward. The Fed is playing an increasingly dangerous game by making up policies as it goes. And there is no real indication that it has any idea how to exit this situation cleanly.
But two things are certain: costs will be going up… and these policies will work… until they don’t… at which point things will be extremely ugly.
On that note, we’ve recently published a Special Report detailing how to prepare for inflation: what investments will profit most from it and why it’s only going to be getting worse going forward.
You can pick up a FREE copy of this 7-page report here:
http://gainspainscapital.com/gpc-inflation/ [5]
Best Regards
Graham Summers