Yesterday humble pie was forced upon me as the FED announced QE3. But not just QE3, but a QE plan to end all QE plans, as it’s promised to continue indefinitely, as long as our illustrious monetary policy setters deem it necessary.
Short-term results were positive for markets across the board. Everything popped as euphoria hit stocks and commodities alike. And many expect interest rates to drop a bit too, though I wouldn’t be so sure.
Are you ready for $4 gas? With oil surging up into the $98 region, we could well be on our way. What happens when gas reaches $4? Milk could start climbing well above the $4 mark. Produce has to get to markets by some means, all of which involve oil consumption.
Today the FED guaranteed that our cost of living will be higher at this time next year. There are two possible scenarios for this to play out.
Scenario one – we continue with inflationary policies, so prices continue to increase. More money in the system means a lower dollar value, which means each dollar buys less. In such a scenario wages rarely, if ever, keep up with inflation. And the doctored CPI the FED uses give the false idea that things aren’t as bad as they really are. In this situation we are taxed through inflation, consolidating the wealth of the poor and middle-class into the hands of the elite.
Scenario two – the market realizes the Ponzi scheme, gets scared, and crashes. In such a scenario the markets wipe out billions, if not trillions, of dollars in wealth, resulting in a constriction of the money supply. This would be deflationary, resulting in lower prices. However, obtaining dollars is hard at first because everyone is scared and holding on to them. The FED will try printing, but velocity of money would dry up, rending the ability to move the economy all but impossible.
The latter scenario is disastrous and would ultimately lead to massive inflation as the FED battles deflation. It might even lead to the abolition of the Federal Reserve – but too late.
I favor the former scenario. While I do think we get a major contraction before the year ends – actually before we’re into the Fall season – I still expect to see markets up by the end of the year, or at least by next Spring. But we should be looking for a larger crash eventually, as this economy is too inflated to maintain its current levels indefinitely.
Recognizing the problem for what it is, Egan-Jones came out with an announcement that may shock readers. Rather than viewing QE as a positive on the economy, they’ve announced plans to possibly lower the U.S. credit rating again. Expecting QE to increase unemployment and stall GDP growth, VP and manager of the ratings’ desk, Bill Hassiepen told MNI (quoted on foreXlive):
“Let’s say six months from now, you might see job actions” in some
of the more commodity-sensitive industries that are particularly
vulnerable to an increase in commodity prices and a weak dollar, he
“This is going to cause the economy to completely stagnate,” he
said, expecting the effect to start within three or four months.
He first expects a “rapid uptick in gasoline and food prices,”
which will affect households’ disposable income. This in turn will take
several months to work its way through into the general economy.
“People are going to feel nostalgic for the 1.7% for the last
quarter,” he said, referring to the second quarter GDP growth.
“Unfortunately we have a Federal Reserve that simply does not
recognize the inflationary impact of food and energy prices any longer,”
He expects another “massive uptick in the speculation in the
strategic commodities and energy markets.” Speculators, he said, hedge
themselves against a depreciating dollar by “boosting up the cost of the
In other words, don’t get too excited about QE3. Monday I’ll try to bring out some charts revealing some technical indications that point to a correction sooner rather than later. However, as I was preparing to post this article, affirmation from Egan-Jones landed in my lap. They’ve now downgraded the U.S. from AA to AA-. I’ll close this week with a quote of their decision.
Up, up, and away – the FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US.
For your prosperity,
J. Keith Johnson
The Gold Informant