By now, it’s almost a given that the Federal Reserve will once again engage in some form of quantitative easing in order to stimulate credit, promote sustainable employment and reach their inflation target.
All of this is supposed to help the economic recovery.
At least, that is what the Federal Reserve states.
I have read about money printing in almost every financial blog, newsletter or institutional economic report. I have also personally written about this in my financial blogs, advocating for gold and investing in Chile as an inflation hedge.
The market is betting that money printing will continue and thus you have observed the dollar tank and gold or agricultural commodities explode to the upside.
Although the government might not report it, there are clear signs of inflation.
I have seen my bills in Chile for groceries consistently go up during the last three months or so. The policies adopted by the Fed have strong implications for consumers worldwide.
The new quantitative easing program will likely be open-ended without a fixed amount of mortgage backed securities or Treasuries to be monetized during an undefined period. The program will stop once the Federal Reserve thinks it is no longer necessary.
Fed member James Bullard proposes a program that will consist in monthly purchases of $100 billion or less of U.S. government bonds. He would pause if these purchases reach $1 trillion because the Fed would be financing the entire net debt that the Treasury is emitting.
I will play devil’s advocate and hope that some sense will enter into the Federal Reserve and they won’t engage in new monetary stimulus.
Here I outline the reasons why the Fed shouldn’t engage in a new quantitative easing program:
• The last quantitative easing program didn’t produce lower interest rates or promote credit expansion in the economy.
• The last program tanked the dollar and made asset prices raise. A new intervention will make commodities explode to the upside causing out of control inflation. The already weak consumer and middle class would suffer enormously from this.
• International holders of Treasuries and bond vigilantes might stop this by dumping their bonds and demanding higher yields because they will be paid in a devalued currency. This adds a great rollover risk to the government debt that is mostly short-term funded.
• The Fed probably won’t have the political support to engage in a new monetization program.
If the Federal Reserve does not engage in more quantitative easing, we will probably see the dollar strengthen and asset markets weaken.
In my opinion, this will probably be a better scenario than seeing strong equity markets with out-of-control inflation that destroys savings and hurts the people.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here
to read more of his articles.
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