Joe Weisenthal, writing for Business Insider, doesn’t tell us much about what he expects of the next step in QE∞, but he does offer some insight into what he thinks will be the next step for the Federal Reserve.
Rather than offer more stimulus via the printing press, he expects the FED to define their terms in such a manner that investors can be confident of clear goals, rather than a somewhat nebulous, “Until unemployment is on track.”
What would the defining terms be? There are a few ideas, such as what Zachary A. Goldfarb suggests in The Washington Post:
Bernanke is also studying the idea of declaring that the Fed will boost the economy until unemployment reaches a specific target or until inflation takes off. Some Fed officials have suggested that the central bank keep on stimulating until unemployment reaches 7 percent or inflation rises to 3 percent; others have proposed Fed action until unemployment reaches 5.5 percent or inflation rises to 2.25 percent.
The 7 percent employment level is that which is proposed by Chicago Fed President Charles Evans. The 5.5 percent was proposed by reformed dove Naryan Kocherlakota in a speech last week. For the Fed to indicate that it wouldn’t tighten until one of those numbers were hit would send the clearest signal yet that low rates will be here for a long time.
And Goldfarb elaborates on the goal and expectation of such a move.
While many top Fed officials agree with a far more detailed approach, the Fed has not reached final agreement on which new steps to take. But any measures would build on the Fed’s announcement this month that it will launch a series of open-ended policies to spur job creation.
Because the economy is looking for any excuse to see things in a rosy light, just about any measure the FED takes is likely to result in a short-term spurt in the velocity of money, with stock indices climbing. It’s easy to see how an announcement that they will not ease up on QE until certain goals are met will provide more confidence in the financial sector. Such confidence could very well send stocks soaring on a euphoric, if unreasonable, expectation that the good times are here to stay.
Such a perspective is highly problematic though. First of all, these efforts to stimulate are artificial and guarantee the American people that the dollar will continue to erode in value. Furthermore, it could actually backfire on the FED if vigilance is eased in light of expectations that the FED keep the boat afloat endlessly.
Regardless of which way things go in the short-term, investors must keep in mind that this is artificial stimulus. It’s not healthy. Indeed, it cannot be healthy in the long run because it guarantees a depreciating dollar and the destruction of middle-class income and whatever savings they might have left, as Goldfarb notes.
The new strategy still carries a number of risks. The most significant is that the Fed’s efforts heat up economic growth in a way that unleashes inflation, which would eat away at middle-class incomes.
Efforts to protect savings can be difficult. Assets are a great hedge, as long as they’re not in a bubble. But if you’re middle-class and your income is depreciating do to inflation, then you may find yourself in a position where investing in anything takes food off your table.
Property values may decrease significantly in the future, as incomes take a hit. Foreign holdings can be difficult to gauge in regard to value and sustainability. Perhaps the safest hedge against inflation is precious metals. Even a few silver coins could make a huge difference in the long run.
For your prosperity,
J. Keith Johnson
The Gold Informant