A more than one
trillion dollar debasement in 2013 is now apparent.
Last week, the Federal Reserve announced an expansion of its bond-buying
program consisting in large scale purchases of long-term treasury securities.
These purchases come in addition to the monthly $ 40 billion in
mortgage-backed securities (MBS), the so called QE3, launched in September of
this year. This means that now, monetary expansion will be equivalent
to a total of $85 billion a month. Simply put, this is an unprecedented
rate of currency creation for the FED.
Thus, a more fitting name for this latest round of easing
would be QE4Ever (QE forever).
The novelty in the Fed's most recent statement is that for
the first time it has linked its bond purchases to specific economic
parameters.
The FED stated it would hold its target interest rate
(currently between 0 and 0.25%) and continue easing for as long as
unemployment remained above 6.5% and inflationary expectations did not exceed
2.5%.
How did the FED select the given unemployment rate
parameter?
Perhaps it is associated with the fact that unemployment
sat at 6.5% at the cusp of the financial crisis in October of 2008.
If the labor market does not improve substantially (hint,
hint... it won't) the FED's Open Market Committee will continue its purchases
of Treasuries and MBS indefinitely with a likely possibility of
increasing these purchases in the future.
The central point for stock markets is that this
ultimately leads to a trap. In the future, positive employment data
could be judged as negative, by signaling an end or a reduction to the FED's
stimulus to an economy that has become dependent on it. This would be
negative for stock markets, as it is no secret that there exists a
direct correlation between monetary stimulus and rising stocks.
However, we must realize that Ben Bernanke, FED chairman,
is not willing to tolerate high unemployment nor is he willing to tolerate
falling stock markets. This exposes an already evident problem: QE
dollar debasement will remain the essential wonder drug to sustain this
ficticious notion of a "recovery".
A simple reminder that in order to lower the unemployment
rate from its peak of 10% in October of 2009 to 7.7% in November of
2012, the FED added $ 1.8 trillion to the currency supply, today closer to
$ 2.7 trillion (see chart). A high price.
At the advertised rate, in less than a year, the FED's
balance sheet could be approaching $ 4 trillion or beyond.
The downside is that this works, until it stops working.
In the end the FED will be unable to perpetuate the false creation
of wealth, because rounds of QE can be viewed as temporary pins that hold up
the ailing economy, until it inevitably falls under its own weight.
What could be done at this juncture? What will come of the
FED tripling the size of its balance sheet and government doing the same with
sovereign debt? It seems that this type of "solution" can
only fit in minds like those of Paul Krugman, for whom the hole is never deep
enough.
Obviously, this cannot be done without suffering terrible
consequences.
Therefore, the farther we go past this point of no return,
the closer we come to the day the crisis reaches the U.S. bond market,
leading to an explosion of interest rates. The bond
bubble will burst.
Only when we approach this critical point will we witness
the massive flight of capital into the only true refuge (gold and silver
bullion) whose bull markets (per usual) must conclude in a final
phase of euphoria.
Indeed, we cannot ignore that short term price risks loom
for precious metals. Price pullbacks simply present new opportunities
for those who have not yet physically secured themselves in the face of the
coming crisis.
Note that precious metal critics (which include a powerful
banking elite with large "short" positions), have continued to
celebrate every recent price correction, spreading propaganda through
headlines and publications questioning bullion's status as a safe haven.
In addition, it is worth noting that unlike when QE3 was
announced, last Wednesday's announcement of further easing was not
particularly bullish for precious metals as can be seen in the chart below: gold
suffered an "unusual" drop after the Comex close.
Again, these temporary downward price signals and
corrections are an opportunity.
The solid fundamentals for bullion we have discussed in
this article will continue to propel gold and silver prices higher in the
longterm.
The FED's nervousness surrounding the "fiscal
cliff" negotiations in Washington and the debt issues in
Europe are signs of a new global crisis emerging.
The ultimate catalyst to crisis is insignificant.
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