From Brian Rogers of Fator Securities
Macro Commentary: The damned if we do, damned if we don’t global economy
QE2 is dead. Long live QE3! Markets rebounded yesterday when Ben Bernanke’s BFF at the WSJ Jon Hilsenrath published an article that quoted senior officials at the Fed as saying that they would give “very serious consideration” to a new round of bond purchases, aka QE3. Not to toot my own horn or anything, but I published a note back on February 2nd called Go All In On Bernanke’s Weak QE3 Hand where I said, “The problem the Fed and Chairman Bernanke now face is that the so-called wealth effect of the rising stock market has been dependent on the existence of QE2 and removing that punch bowl could cause the party to end and reverse the gains, both economic and market, that we have seen in the last 5 months.” At the time, you’ll recall, the market was solidly convinced that QE2 would be the last and final round of QE from the Fed. I disagreed. Unfortunately, it’s starting to look like I was right. However, as a long-time buyer of gold and silver, I have to admit that these never ending rounds QE are a gift from the (finance) Gods. But why should the market get excited about a policy that’s essentially failed, twice, to do anything except temporarily juice stocks higher? I think it’s very simple, the Fed cannot afford to be seen as helpless, they must do something, anything. Otherwise, why have them as Ron Paul might ask? And besides, at this point in the game, what else can they do? Lower rates? Nope, zero-bound already. Lower reserve requirements? Not likely, our TBTF banks are already scraping by with mark-to-model accounting on real estate assets that are currently worth less than they were in 2008 yet still somehow are marked at or close to par. Lowering reserve requirements would likely cause the banking panic currently growing in Europe to quickly jump the pond and land on our shores. Which leaves us with QE3/asset purchases.
So what size would make a difference this time? How about $300bn or half of QE2? Probably will never fly. Markets will be underwhelmed and it’s doubtful the Bernank would get the wealth effect he so desperately desires. How about the same size as QE2 or $600bn? Could be, but why waste time? Just get it over with. Billions with a “b” are so 2008, let’s move this thing forward with the gusto that only the masters of the universe at the Fed can muster and get to the trillions. If the Bernank is convinced that the Great Depression was caused by a lack of liquidity then climb in that helicopter and start dropping real money. As a gold/silver owner, I am completely on board with this QE3 thinking as my portfolio will do great. As for inflation, the USD, commodity prices and global stability, well those things will probably suffer but again, the Fed must do something, anything. Other countries, however, won’t like this policy at all.
Which brings us to the next phase of the global debt crisis which will eventually lead to the Great Reset, currency wars. Switzerland and Japan both intervened in their currency markets yesterday. Both currencies temporarily sold off and are now rallying again as the massive currency market simply overwhelms the actions of lesser central banks. Could capital controls be the next phase of the battle? Banco Fator’s chief economist, Jose Goncalves, has argued since the beginning of 2011 that capital controls could very likely be put in place by one of the countries suffering from a stronger currency. Countries like Brazil, Chile, South Korea, Switzerland or Japan that are facing shrinking exports will become a first-mover into currency controls, however, rather than being ostracized by the rest of the world, instead they will be quickly followed by the others. Yes, global trade will suffer as a result. But what option do these countries have? Force industries to become more competitive, efficient and learn how to compete? That’s a great answer for the long-run, but governments always operate in the short-run. So at some point, especially if QE3 is officially announced, capital controls and protective tariffs will come back. Welcome back Smoot-Hawley, we hardly missed you!
This leads us to the current state of economic affairs which I like to call, “Damned if you do, damned if you don’t.” The US is weakening economically, so we “must” do QE3. But this could create inflation and evidence from the previous rounds show little if any benefits to the underlying economy. The US also has to become more fiscally austere and raise more revenue. But this will act as a drag on GDP and will likely be deflationary. In Germany, the country must bear the brunt of the costs for bailing out the periphery which will ultimately cause higher taxes and debt levels there which will slow GDP. If they don’t, the periphery could break out of the EUR, the remaining relatively stronger northern European countries would make the new EUR a much stronger currency and Germany will see its exports collapse. China must continually build bridges, bullet trains and malls to nowhere to keep their GDP growing. Yet the inflation created, particularly in real estate, risks destabilizing their banking system and could spark social unrest. Brazil must fight the strengthening BRL, yet the strong BRL is helping offset domestic inflation which continues to run above the central banks’ upper targeting band. And the examples go on and on. So is QE3 really that bad? In the end, it won’t matter much, we’re damned if we do, damned if we don’t. So go ahead Chairman Bernanke, bow out your chest and push QE3 into the trillions. Gold and silver investors will thank you.
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