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Last Updated on: 15th November 2013, 02:39 am
Chairman Bernanke said in June of this year that tapering of the $85 billion per month QE program would almost certainly happen later this year, with QE wrapping up by mid-2014.
But in September, the Federal Reserve defied market expectations and said it will not begin pulling back on its asset purchasing program.
The economy continues to stumble toward recovery, and although the Fed made it clear that tapering was conditional upon the health of the economy, they continued to give indications all summer that we were on the verge of reducing the $85 billion figure to a lower level.
However, mortgage applications, consumer confidence, and unemployment numbers were all dismal as the Fed once again proved they can’t forecast any better than the local weatherman.
After the announcement, traders cheered and stocks on the Dow industrials and S&P 500 averages surged to record highs. At the same time, bond yields moved sharply lower, with the benchmark 10-year yield falling to 2.76%.
To further confuse the markets, Bernanke added that the Fed “would taper at some point, possibly later this year.”
Well, “later this year” is now, and there’s no tapering in sight.
The Fed Will Never Taper
First, we need to realize that the Fed is never going to taper. If they quit buying government debt, interest rates will go up.
And they can’t have that because the US government would then pay more interest on a staggering $17 trillion of debt.
Each percentage point in higher interest is $170 billion dollars, which is equivalent to almost 9% of our total tax receipts. With the budget deficit issues already causing a government shutdown this year, substantially higher interest rates would cause a major budget crisis.
Furthermore, the Fed is currently buying approximately 90% of all newly issued government bonds, and if they stopped, who else would buy all the bonds?
The fact that they’re buying 90% of all newly issued bonds tells you that virtually no one else is buying them.
And so, the Fed along with the US government have painted themselves into a corner.
Not that they are overly concerned anyway – they believe that you can print unlimited amounts of money in a slow economy without negative effects.
And if there’s one lesson of the Great Depression of the 1930’s Bernanke thinks he’s learned, it’s that the Fed needs to aggressively provide stimulus to wart off deflation.
It’s true, deflation is not good. And it’s maybe the most important reason why the Fed will never, ever quit the QE program.
That’s because deflation means lower prices, lower tax revenues, and therefore the US government would have a much harder time paying its debt service.
In contrast, if there’s inflation, it’s much easier to pay off your debt when dollars are cheap and getting cheaper by the year.
The Yellen Regime is On Board
Politically, printing more and more money is the path of least resistance.
Janet Yellen, the next chairman of the Fed, says the U.S. economic recovery is “still fragile” and needs support from Fed stimulus.
“The (Fed's bond) purchases have made a meaningful contribution to economic growth and improving the outlook,” said Yellen during a Senate banking committee hearing on her nomination to become chairman of the Federal Reserve.
Yellen sounds like she’s not afraid to overshoot on the high side of inflation, and appears ready and willing to print whatever amounts are necessary to prevent deflation.
So what does it all mean for gold?
Simply stated, the dollar will be the victim, and gold will be the victor. The dollar will continue to weaken, as planned, and the by-product will be that gold goes up.
Don’t wait until there’s a crisis to buy gold. You may find yourself unable to find any.