Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

QE + Desperation = Higher Gold Prices

Commodities / Gold and Silver 2013 Oct 30, 2013 - 03:47 PM GMT

By: DeviantInvestor

Commodities

The Setup

A century ago bankers created the plan for a U.S. central bank, bought enough votes to get it passed into law, encouraged deficit spending, government debt, and extracting the interest payments from taxpayers. The process has worked well for the bankers.


After several expensive wars and the expansion of social programs the U.S. had created considerable debt. In fact, debt and the money supply had increased so much that inflation became a serious problem in the 1960s. Further, the U.S. trading partners no longer wanted dollars but wanted gold instead since they could see that dollars were being created indiscriminately and were losing their value. Nixon (August 15, 1971) did what was good for the financial industry, severed the remaining connection between the dollar and gold, allowed the money supply and debt to increase to never-seen-before levels, and planted the seeds of self-destruction for the dollar and the US economy.

The Crash

The process continued until 2008 when the debt and derivatives bubbles had grown so massive that the economy could no longer sustain them. The economy and stock market crashed and financial and political leaders stared "into the abyss" of deflationary collapse, reduced Wall Street income and bonuses, loss of votes, and did what they perceived as necessary: printing money, Quantitative Easing (QE), injecting liquidity, bond monetization, extend and pretend, and so on.

The "Solution"

The choice was made to "solve" an excessive debt problem by creating more debt - Quantitative Easing (QE) and increased deficit spending. Deficits were increased to a $Trillion or so per year while the government bailed out the bankers and politicians and the public watched Reality TV. It appeared to work, somewhat, for a while.

As Bill Bonner says:

"With regards to QE, the poles of possibility are as follows:

  • QE does nothing important. If this were so, there would be no reason to keep it.
  • QE is essential to the economy. If this were so, they couldn't get rid of it... no matter what the jobs report says.

Most likely, QE lies somewhere in between..."

So the economy (financial industry) and government are desperate for QE, and similar to being hooked on "meth," they find it difficult to kick the habit and get off the "drugs" of QE, money printing, and central banking. As Gold Stock Bull says,

"The economy is addicted to QE and reliant on central bank stimulus to stay afloat. The world now understands that the FED cannot end the bond-buying program and has no intention of doing so anytime soon. If anything, we are likely to see increased quantitative easing in the future, just as a drug addict must up their dosage in order to have the same impact. This monetization of debt increases the bullish outlook on gold, as the gold price has historically trended higher along with the FED balance sheet."

But how much QE? Surely it must stop sometime! Maybe not! What does the Fed say?

Michael Pento:

"This is from the interview at CNBC: "Does the Fed have a limit to its balance sheet? Charlie, is there a limit? You are headed towards $4 trillion. Could it be $5 trillion? Could it be $12 trillion? What limits the size of the Fed's balance sheet?" And here is the answer from the Fed President Charles Evans, who happens to be simpatico with Janet Yellen and Ben Bernanke:

"Well, I think the Fed needs to do whatever is necessary to help meet our dual mandate objectives. I don't really think about it as far as limits are concerned because I think there is a tremendous amount of capacity. We can go as long as necessary."

"That's not me saying it, that's not King World News saying it. That comes, as they say, 'From the horse's mouth.' This is a watershed moment in the Fed's history. I've been saying it for many, many months, if not years, and you've been saying it on your network, Eric -- that the Fed's QE program is without end. It's interminable. And now we have the Federal Reserve admitting that there is no limit, no dollar amount restriction, as to how high they will take the Fed's balance sheet."

So the Fed must continue QE and probably will increase the monthly purchases of bonds to delay deflationary forces, fund the government, levitate the stock market, and prevent another crash. This is desperation!

Marc Faber and Deepcaster :

"The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion], $200 [billion], a trillion dollars a month..."

"The Fed has boxed itself into a position where there is no exit strategy (and created) a colossal asset bubble..."

Continue QE and you get hyperinflation ..."

"Halt, or even taper, QE and the markets crash."

The picture, sans Fed propaganda, is increasingly clear. QE is necessary to supplement the financial industry and the voracious appetite of the U.S. government for more spending. Merely slowing QE will probably cause markets to crash, interest rates to rise, the government's expense for interest on past debt will increase while tax revenues decline, and consequently the government needs more, not less, QE.

The thought that "there is no way out" should occur to us!

In fact, Richard Koo calls it the "QE trap."

"Koo has been meeting with clients and officials in the U.S., and he says he hasn't been able to find anyone to refute the theory that the U.S. economy is currently ensnared in the 'QE trap'."

Of course there is always a way out - the "nuclear" option - let it crash and burn! But no one wants a crash as everyone will be hurt by that choice. Consequently the Fed and the U.S. government (the powers that be - TPTB) scramble desperately. What are the options?

  • More QE buys time. Less QE might well cause a crash. So TPTB choose more QE.

  • More spending keeps the big corporations (who make LARGE donations to congress) happy. If the government spends less, "everyone" complains. So TPTB choose more spending, more deficits, and more QE.

  • Higher interest rates mean that the interest expense for the U.S. government increases. More interest expense means larger deficits and so TPTB are forced to choose more QE.

  • Foreign purchases (China, Japan, Russia etc.) of newly issued U.S. treasury debt are decreasing while some countries are actually reducing their current holdings of treasury debt. This forces the Fed to be the "buyer of last resort" and purchase, via more QE, the debt that normally would have been purchased by China, Japan, Russia and others. Fewer foreign purchases necessitate more QE.

  • A weaker economy and fewer people employed means less economic activity, diminished tax receipts and larger deficits. Those larger deficits guarantee more borrowing and more QE.

  • Obamacare will create more government expenses and less disposable income for average Americans, which means less consumer spending and therefore less tax revenue for federal, state, and local governments. There is no choice here - it is already law and we are going DOWN that road to much higher consumer costs, lower government revenue, and more government control. The result will be a government desperate for more revenue and more QE.

It does indeed look like a "QE trap." So ask yourself:

  • More QE will weaken the dollar, on average, because more supply indicates less value for each dollar. What will that do to consumer prices for food and energy when the inevitable inflation works its way into the consumer economy?

  • What will happen to the prices for gold and silver when the realization finally hits the populace that interest rates are rising, QE is here forever, congress will never balance the budget, and the dollar will continue to weaken. (Hint: There is no fever like gold fever.)

  • It is clear that other countries increasingly dislike the U.S. dollar, U.S. treasury debt, and the current policies of the U.S. administration. How much will the prices for imported oil, gold, and silver increase as a consequence of the above?

  • What will a dollar collapse do to the prices of gold and silver?

  • Knowing the policies of the Fed, the congress, the administration, and the inevitability of QE, do you own enough gold, silver, platinum, land, diamonds, collectible art and other non-paper assets such that you can sleep well at night?

Commentary from other astute writers:

"The Fed Can Only Fail" Chris Martinson

"The Collapse of the Dollar is Unavoidable" Peter Schiff

"The Coming Collapse of U.S. and World Conventional Paper Assets" SRSrocco Report

"Horrific Consequences for the US and For the World" Egon von Greyerz

"A Tale of Two Charts" John Rubino

"Chump Change Could Do It" Bill Holter

"The Madness Continues" Andy Sutton

Conclusions

The U.S. government has spent itself into the "no-win" position whereby more QE is both necessary and dangerous. Most current policies, such as congressional gridlock, inability to pass a budget for five years, Obamacare, weakening economy and tax receipts, declining relations with foreign nations, massive deficits, declining total employment, inability to reduce spending, ongoing wars, probability of future wars, and more, suggest that QE must continue and probably increase.

Stocks may protect you (read John Rubino above) but gold and silver are the safer choice given the inevitability of more QE and a potential dollar collapse.

You decide!

GE Christenson aka Deviant Investor If you would like to be updated on new blog posts, please subscribe to my RSS Feed or e-mail

© 2013 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in