Critics Believe Second Round of Quantitative Easing By the Fed Will Further Devalue the Dollar and Create Inflation
Federal Reserve Chairman Ben Bernanke has been quoted as saying he would fly over the United States and drop dollars from a helicopter should it be necessary.
Sans helicopter, for the time being at any rate, the Federal Reserve has announced that it plans to breathe new life into the economy with additional quantitative easing, a series of Treasury purchases starting with $600,000,000 that may ultimately total $1 trillion or more according to some sources. With the U.S. economy expanding at just 2 percent annually in the third quarter of this year and the jobless rate apparently stalled at about 9.6 percent, the Fed was pressured to do something to stimulate the economy.
Bernanke explained to students at Jacksonville University that a second round of easing will enable the Fed to accomplish its two Congressional mandates, ensuring full employment and stable prices while preventing deflation and generating some “good” inflation.
Critics say the dollar will weaken and create inflation
Critics believe that the dollar will weaken as these purchases (accomplished by printing money) increase the Fed’s balance sheet. Inflation is fueled by a weaker dollar as the real price of goods and services becomes more expensive. Using past research and her own models, Goldman Sachs strategist Robin Brooks suggests the dollar will need to drop a great deal more than the Federal Reserve thinks in order to meet the central bank’s inflation target.
“Substantial additional monetary stimulus is needed for the Fed to meet its dual mandate on inflation and employment,” wrote Brooks after the Fed’s announcement. She has raised her estimate for the total size of this second round of quantitative easing from $1 trillion to $2 trillion. “If indeed the Fed sees the dollar as one of its key policy levers for preventing inflation from staying below its mandate for a prolonged period, the dollar needs to fall a lot further from here,” says Brooks.
The big question is when Bernanke discovers that the plan isn’t working, how much farther could the dollar fall? This controversial plan of additional quantitative easing takes the Fed into essentially uncharted waters and puts the dollar at risk of crashing. Frankly, these additional bond purchases could be more destructive than critics even think if inflation is ignited when the economy finally comes around.
A recipe for currency wars
“Our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States,” Bernanke said in response to questions from college students in Jacksonville, Florida. “A strong U.S. economy, a recovering economy, is critical not just for Americans but it’s also critical for the global recovery.”
Overseas officials see it differently, however. Many believe the Fed’s plan may not only affect their economies negatively, but fail to accomplish the objective in the United States as well.
- “We are all under attack by the relaxed monetary policy of the United States,” Colombian Finance Minister Juan Carlos Echeverry told investors.
- Among other comments, China’s central bank chief said the Federal Reserve’s plan reinforced the need to reform the global financial system.
- German Finance Minister Wolfgang Schaeuble was quoted as saying: “I don’t think the Americans will solve their problems with this and I think they are creating extra problems for the world.”
- Brazil’s finance minister stated that the move would devalue the dollar, negatively affect Brazil and other exporters and be ineffective without other changes. In a reference to Bernanke’s aeronautical moniker, he also stated: “It’s no use throwing dollars out of a helicopter.”
- The Philippine central bank stated it would “remain vigilant” and a bank deputy governor warned the Fed’s move might exacerbate instability in emerging markets.
Four Reasons Why This “Gold” Bull Market Is Nowhere Near the Top
Reason #1. It is obvious that the trend for the dollar is down and “Helicopter” Ben Bernanke and the Federal Reserve are dead set on debasement. Bernanke wants a weaker dollar pure and simple. The current climate of low inflation in the United States has generated comparisons to Japan’s “lost decade” where deflation prevailed. Unlike Japan, however, the United States finances its deficits externally. Our destiny will be different and the dollar may crash in that process.
Reason #2. It is obvious that the Fed sees deflation as the death knell to the debt bubble and is willing to debase the dollar to prevent any chance of deflation. This, in my view, is a very wrong policy. We must brace ourselves for a much weaker dollar.
Reason #3. Add the massive new debt, involvement in conflicts around the globe, the possibility of terrorist threats, the potential debacle when the United States cannot meet its obligations, rising mortgage failures, out of control entitlements, outsourcing and the burgeoning economic power of Asia, a stagnating economy and ever increasing unemployment to the threat of inflation and the case for gold couldn’t be stronger. When the direction of the dollar is down, the direction of gold in its various forms, including coins, is up!
Reason #4. This bull market is nowhere near the top and the multi-year gold bull market is firmly intact. Commodity price cycles tend to last multiple decades and the current bull cycle only began in 2001. Gold’s recent run has been slow and steady due to the greater affluence in the developing countries where people have traditionally turned to gold as a store of wealth. All savvy investors should take note.
Make sure your portfolio is appropriately diversified
Historically, gold has performed well in times of political and financial turmoil. Gold hit an all-time high (adjusted for inflation) in 1980 during the Iran hostage crisis and when the Soviets invaded Afghanistan. The geopolitical climate today is also volatile. Consider the ongoing conflicts in Iraq and Afghanistan, the pursuit of nuclear arms by Iran and North Korea and the fact that the major economies of the world have assumed extensive amounts of debt. The economic instability of Greece and other nations hasn’t gone away. The United States is still battling ever-increasing unemployment and job losses even after it has spent hundreds of billions of dollars in stimulus money. All of these factors make a strong bullish case for gold. In fact, a recent Bloomberg survey of 29 analysts proved to be very bullish for 2011.
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