QE3: Watering the Money Tree

A third quantitative easing program almost certainly awaits because the Fed is incapable of letting interest rates rise due to the detrimental effects this would have on their balance sheet. The only way they can secure interest rates at a lower level than they were purchased is to keep on buying more securities with printed money and enforce a cap/ceiling on market interest rates. 

The Fed is certainly not going to sell assets because they are currently the major purchasers of the asset markets they participate in, i.e. Treasuries, agency debt and mortgage backed securities. The Fed being the major holder and purchaser of particular assets has led the Fed to mark their assets to prices which they would pay, not necessarily the price of an outside buyer, and should the Fed become a major seller of these assets the need for mark downs versus current valuations is highly likely. In this circumstance, the Fed will again come face to face with their tiny capital base as they are unable to absorb losses of even 1% on their current asset markings without going insolvent.

Without QE3, interest rates can be expected to rise, and this should influence the Fed to step in and try restrain yields. Even though money printing has continued since the end of QE2, this is insufficient to maintain the Fed?s bubble. If interest rates rise substantively, this will put major pressure on sovereign, state and household solvency and could lead to near future bankruptcies across the board. The Fed will not stand idle and will come in to try paper over the markets problems in an illusory rescue attempt.

Bill Gross, manager of the world?s largest bond hedge fund, says bond yields should rise after the Fed ends QE2. Who is going to buy those treasures when a trillion dollars of purchasing power exits the market, he asks? (see video interview) With the Fed?s intent to restrain bond yields from rising, another money printing program is the only solution in their tool kit.

Whether preemptive or responsive, the Fed?s reaction this time around will likely be much faster than in previous episodes. The Fed is much more equipped now, after having several new powers resolved by congress and experiencing the 2008 chapter of the crisis, and are now unlikely to be as timid and lagging going forward.

Another way of seeing the inevitability of QE3 is realizing that the Fed has two mandates, price stability and low unemployment. The Fed has convinced themselves that inflation is not a problem so the only responsibility left for them is to ensure a high level of employment. The only measure the Fed has to even attempt to influence this is to print money, and yesterday's Fed statement indicated that they are concerned about the level of unemployment, meaning they're getting ready for a new money printing program to try and address this.

All of the above points to good times ahead for gold and silver as the money printing spigot is more easily turned on rather than addressing the core issues.

Source

US Economy At Risk For 2013 Recession

The latest data of durable goods orders, released Friday by the Commerce Department showed an increase of 4.2% for July but excluding transportation goods the order declined by 04%. 

In addition orders for capital goods fell 3.4% over the same month while the June figure was revised down to 2.7%. 

The latest data are not only very weak but are a sign of the weakest economic recovery since WWII according to several US economists and analysts. The decline in capital goods orders is a sign that US companies are hesitant to invest and expand their production capacity in light of global uncertainty. 

China, Europe and Brazil, once thought as the economic drivers to set the tone of recovery after the end of the economic recession in the summer of 2009, are now struggling themselves to keep their growth at a steady pace. 

We have seen large dips in economic growth in China to an annual rate of 8%, down from 11% during 2011, and continued fiscal and debt struggles in Europe which largely affect the US economic growth overall since both regions are crucial to the US production output and exports. 

US exports to both regions have been stagnating since 2007 due to a slowing demand from Europe and China. 

China in particular struggles with high inflationary pressures which lead the government to intervene through quantitative easing to ensure their economy does not overheat. That results in a net decline of production materials which in large part are imported from the US. 

Europe on the other hand is still not out of the woodworks when it comes to curbing the budget shortfalls and the debt/GDP ratios of some members which puts extra pressure on Germany, France and The Netherlands to control their inflation for the benefit of euro stabilization. 

The US economy continues to grow albeit at a very slow rate but should the durable goods orders continue to falter then the risk of a double-dip recession in 2013 is not unimaginable. 

This scenario would result in the unemployment rate rising again to 9%, currently at 8.3%, when the expected budget cuts and tax increases take effect early 2013. 

The Federal Reserve has yet to give a sign that it is willing to implement QE3 but given the latest data it is expected that the next FOMC (Federal Open Market Committee) may hint at a higher possibility of bond buy-back programs to curb long-term interest rates even further and to encourage business borrowing and spending to keep the US economy for retracting any further. 

Written by Nick Doms © 2012, all rights reserved.