As we come to the close of our series on quantitative easing, it’s apparent that a conclusion is anything but clear. What some are calling QE3 is basically a repeat of the purchasing of mortgage backed securities that we saw in QE1 and 2. What future will calHowever, unlike previous rounds, this round has no time limit, no clearly set goal and no limit on amount, other than the $40 billion a month.
The FED stated that they will continue this course until a correction is well under way. In other words, as long as things are looking bad, they’ll continue buying securities. And many expect this purchase of securities to extend well beyond mortgages. Some even expect the FED to begin purchasing stocks or some sort of derivatives.
At this point I don’t think anything should surprise us. In fact, there is even recent discussion that bond debt could be forgiven. Whether this is wishful thinking or serious contemplation is not yet clear. But it certainly would be interesting.
The discussion on this matter is complex and varying in perspective. Some think we’d encounter deflation, because of the instant evaporation of wealth in the bonds that the FED would forgive. On the other hand, some expect such a move to be inflationary, since it would take almost $9 trillion in debt pressure off the U.S. economy.
Remember from past discussions that true deflation and inflation are directly tied to money supply. So, from this perspective, it is quite apparent that such forgiveness would be, in some sense, deflationary. The bonds would simply cease to exist.
On the other hand, bonds aren’t really money. They’re a contract. In this sense, since the funds that were used to purchase the bonds are already in circulation, there’s a sense in which it’s a wash.
However, still thinking along these lines, it is very possible that the “unburdening” of the funds needed to pay off the bonds could easily be inflationary.
It’s a perplexing case. And, rather than attempting to walk readers through every nuance, let us simply offer a couple of articles for you to consider. The first one is a blog by Gavyn Davies. Though our conclusions differ a bit, he seems to wrestle with the challenges well. The second is a longer and much more in-depth research paper by Davies and some of his colleagues.
Regardless of how the FED handles their current balance sheet, it is evident that more inflation is ahead. We’re in a situation that cannot be redeemed through normal means. And, even if the debt is forgiven, our deficit continues to be a major problem that will not go away. Furthermore, we’ve already shown that, as a nation, if we can get away with fiscal irresponsibility, we won’t govern ourselves in a responsible manner. Instead, we’ll take advantage of it for personal gain. Don’t expect that to change anytime soon.
The question that really nags is, “When will the gig be up?” How long will it take for the irresponsible actions of the FED, US Treasury and ruling class of America to come to a head? When that time finally comes, it’ll be the poor and middle-class who ultimately pay the price. The ruling class and elite will have consolidated whatever wealth they could in the process.
For your prosperity,
J. Keith Johnson
The Gold Informant