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A month ago,
I presented the case for why Fed Chairman Bernanke would have strong
motivation to launch another round of quantitative easing (QE) before the
election. In short, it would save him his job. Now, I didn't predict with
certainty that he would do so - only the few men at the FOMC knew that for
sure - but it seemed likely. Shortly thereafter, Bernanke not only announced
more stimulus, but promised to keep it flowing to
the tune of an additional $40 billion a month until conditions improve. As I
had written, this is essentially the election platform of the Obama-Bernanke
ticket: we will keep the party going indefinitely.
Unfortunately,
though these are two powerful men, they are not above the law of economics.
While critics have dubbed this program "QEternity"
or "QE-Infinity", it will end much before that. We are witnessing a
massive bubble in US government debt, and we've reached the point where no
one in charge believes it will ever end - an excellent contra-indicator.
Rather than
going on for eternity, this third round of QE is only hastening the day when
there is a flight of confidence from the dollar and US Treasuries. This will
cause a sharp rise in market interest rates and surging consumer prices
across America. If you think $4 a gallon gas is bad, wait till you see it
going up by 25¢ or more per week.
At this
point, the Fed Chairman will have a choice to make: keep printing, which will
push the dollar into uncontrollable hyperinflation, or begin tightening,
which will bankrupt the US government and banking system.
I have long
written about this Sophie's choice confronting the Fed, but so far the
printing option has been too easy. With the world only slowly abandoning the
dollar as the reserve currency and the euro crisis offering a distraction,
the Fed has been able to more than double the money supply without US consumers
seeing out-of-control price hikes at the store. Not that there hasn't been
inflation - look at housing, gas, or the stock market - but it hasn't reached
crisis proportions. When prices start rising fast enough for the average
person to figure out he's being screwed, then there will be riots in the
streets.
The good news
for precious metals investors is that either scenario is bullish for
gold and silver.
If the Fed
pushes this insanity to the point of hyperinflation, precious metals will
quickly be seen as a form of money that can purchase the same amount of goods
week-after-week, month-after-month.
If there is
tightening, prices might stabilize, but the federal government and its
banking cartel will likely go bankrupt in tandem. That means no bailout money
will be forthcoming, no FDIC insurance can be paid, and banks may go on
holiday for lack of reserves. This is what happened in Iceland in 2008, when
its big banks had debts 10X the size of the country's GDP. There was no way
for the government to offer a bailout, so the whole edifice came crashing
down. While the 320 thousand citizens of Iceland didn't make a big dent in
the currency markets during this transition, you better bet the 320 million
citizens of the United States will.
As we've seen
in cases like Argentina's in the '90s and Hungary's in the '40s, when the
banking system freezes, hard assets trade at a premium. Gold and silver coins
may be at a disadvantage in terms of convenience in an era of credit cards
and Paypal, but what happens when those funds are
no longer available? Already, regulations and lower profit margins have
driven banks to add fees to debit card transactions. Not to mention that
every digital transaction is traceable by the tax authorities.
If everyone
starts to carry rolls of cash everywhere, it's not a big leap to carry coins.
A silver coin the size of a dime is currently worth about $3.50. Two could
buy you lunch.
While I
believe a tightening and national default would put the US on the road to
recovery, the transition period will be messy. Bread lines, rampant
foreclosures, and a spike in crime are likely results. In this situation,
gold and silver may be the only things people can count on. In fact, they are
likely to not only hold their value, but dramatically appreciate as millions
of people flood the metals market and the dollar economy deleverages. In
plain English: maybe it will only take one of those dime-sized silver coins
to buy lunch. Maybe that coin will buy lunch for you and a friend.
Bernanke and
his Wall Street supporters see cheap money until the horizon - but that
horizon is really a painted brick wall. So it's not QE-Infinity, it's QE until the Fed either recognizes the brick wall and
slams on the brakes, or doesn't and crashes into it. Either way, the only way
to get off this locomotive is to invest in hard assets.
Peter Schiff is CEO of Euro Pacific
Precious Metals, a gold and silver dealer selling
reputable, well-known bullion coins and bars at competitive prices.
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