Tuesday, March 9, 2010

When Will the Fed Announce More QE (Money Printing to Buy Treasuries/Bad Bank Assets)?

I've been getting a lot of inquiry as to when we can expect Banana Ben to announce the extension of the Fed using printed money and Taxpayer guarantees to continue bailing out Big Banks and the Treasury.  My answer is that we may not see Banana Ben advertise his continued deployment of money-dropping helicopters.  In fact, I would like to post a quote from Alan Blinder, multi-decade Princeton professor and academic colleague of Banana Ben AND a former Vice Chairman and FOMC Commitee member of the Fed:
"The last duty of a central banker is to tell the public the truth." -- Alan Blinder, Vice Chairman of the Federal Reserve, on PBS's Nightly Business Report in 1994
Just stare at that Statement for awhile and learn to stand in awe of it as a fundamental Truth of Nature.  It really deserves to be incorporated into the Constitution as part of the Bill of Rights.

The fact of the matter is that QE is going on as we speak, only it's disguised as Treasury, aka Taxpayer guarantees. The FNM/FRE/FHA/FDIC/State Unemployment Fund bailouts are QE. The GMAC/AIG cash bailouts are QE. It's QE because the Treasury has to sell additional debt in order to raise the funds. That money will never be paid back. Even though Treasury debt issuance, or a fractionalized bank loan, does not show up in M2, when debt issued has NO chance of eventual repayment it is the same damn thing as printing money.

As for when the Fed will announce additional mortage/Treasury QE:   they may not make an explicit announcement. They are playing games with the Treasury auctions and mortgage buybacks by playing "hide the real source of funding behind the big mysterious buyers." In effect, this is really QE in disguise.

The other fact is that several Federal Reserve officials have already issued public statements in which they explicity expressed the probable need for an extension of QE, including Bill Dudley, head of the all-powerful NY Fed and Janet Yellen, SF Fed head who is vying for one of the three vacant FOMC Board Member seats.

So my direct answer to the question is that QE will not end and the Fed will do whatever it takes to continue printing money at an accelerating rate, but in a way that will be insidiously devious. There are many reasons the Fed has spent $10's of millions on the effort to successfully quosh Congressional legislation requiring an audit.  The ability to hide the true money supply is one the primary reasons.

In fact, we can expect that the Fed/Govt is now entering into the final chapter of the U.S. dollar, in which the laws of history and of economics suggest that the process of QE is going to accelerate, increasing at a geometric rate until the U.S. dollar collapses.  Rob Kirby wrote a must-read analysis for financialsense.com yesterday (kudos to DC of NJ for sourcing this):  Here is the link:  Rob Kirby and here is his brilliant chart he posted:

(click on the chart to enlarge)

That chart is even more tragically beautiful than the Alan Blinder statement that preceded it - both are the golden truth.  The economic law to which I refer is know as "the law diminishing marginal returns." This law applied to money printing dicatates that the amount of money to be printed will have to increase at an increasing rate in order to maintain the intended result, at the margin.  In other words, as is reflected in Mr. Kirby's chart, if the Fed does not keep printing more money at a faster rate, the system will completely collapse.  History has repeatedly given us this result - that plus we can expect, at some point, that price inflation will accelerate at an increasing rate.


  1. This theory would predict that the demand for gold was rising. However experts from hard asset investors are showing conclusive that gold demand fell last year by 10%. Yes gold demand fell accordinbg to Julian Murdoch.


    The only boom appears to be cash for gold sales clearly the market has topped according to the World Gold Council figures.

  2. @Anonymous: against my better judgement, I read the article you linked. There's a couple fundamental problems with the data and the thesis.

    1) It has been shown/proved ad nauseum by many researchers that the World Gold Council's data is, best case, wrong and, likely, fraudulent. The World Gold Council officials give speeches at almost every large precious metals conference which express bearish views. They are notorious for this. If you believe the data coming out of the WGC, then you probably also blieve the economic data reported by the U.S. Government. It would be a mistake to believe that both entities release anything more than Orwellian lies.

    2) It has been shown, ad nauseum and by several researchers, that Central Bank supply, which up until this year had been roughly 1000 tonnes/year. In 2009, Central Banks became nets buyers of gold. That is a verifiable fact. It is also likely that the biggest buyer, China, has been underreporting its gold accumulation.

    3) It is true that 2009 saw a brief period in Jan/Feb/Mar in which scrap sales dramatically upticked. HOWEVER, and John Brimelow tracks this metric daily as reported by a couple different market sources in London who monitor the flow of scrap, that since June/July '09, scrap/recycled gold supply has been minimal and a non-factor in supply

    4) re: Cash 4 Gold businesses. The reason they are aggressively coaxing sellers, and it is mainly a business model that works only in the U.S. (I know someone who is an investor in the original Cash 4 Gold business down in Florida) is because the demand for gold continues to be a lot greater than the supply (and it has been for over 10 years.

    5) Stop wasting your time with commentary that promotes the WGC garbage. Check out a 2-week free trial of www.lemetropolecafe.com - all you need is an email address, you don't even have to put up a credit card number.

  3. The USD has been devalued by 96% since 1913. Another way of thinking about the chart given by Rob Kirby is that the last 4% will go up in a flash fire of epic proportions.

    Anybody in paper on that part of the curve is in the "greater fools" camp.

    Joe M.

  4. Hi anon,

    A couple other thoughts (yes the WGC is shady)

    1) Your article says:

    "In reality, total gold demand actually fell in 2009, down 11 percent year-over-year. But due to the higher average price per ounce in 2009, the dollar value of gold demand remained roughly the same."

    Demand was the same in fiat dollars, the price just went up. Who could of known? Oh yeah, remember the supply and demand chart they teach in econ 101? This is basic economics - the amount transacted will fall relative to the price rises.

    2) your article says:

    "Bullion held by the SPDR Gold Trust (NYSE Arca: GLD) has fallen to 1,115.51 metric tons - down 1.6 percent for the year. That's a big change from the 45 percent inventory increase GLD saw last year."

    GLD is a fraud that doesn't have all the gold they claim to, as well documented here and everywhere else. Many would argue GLD being a fractional reserve fund that is short the amount of physical it should have is a bullish indicator.

    3) Your article talks about the weakened demand in areas like jewelry and commercial uses like dentistry.

    These trends are beyond incredibly bullish for gold. Gold can become too expensive for jewelry or commodity uses, but not too expensive in its monetary role. See (http://fofoa.blogspot.com/2010/03/of-currency-wars.html?showComment=1267740359848#c5862728804194610744). Also be aware much of what WGC calls jewelry is really monetary demand - think fro example the wedding dowry/wedding gifts in India, which are in jewelry form but are treasured as monetary protection, as real wealth. Indian wives do not hold gold jewelery for the same reason Americans might "bling it out" with gold.

    This is what you are seeing - other uses abandoned as gold assumes its monetary role. There is no better argument for owning gold than the remonetization of gold (or as others like FOFOA and Another call it, the demonetization of gold).

    4) Your article says:

    "Cash For Gold's Effect On Supply

    According to the World Gold Council, total gold supply was up 11 percent year-over-year in 2009, primarily due to a spike in recycled gold entering the market in the first quarter: "

    Again, incredibly bullish for Gold as we see gold moving from weaker to stronger hands in the secondary market, or as discussed above, an evolution from those who hold gold for jewelery/commercial to those who value gold as a monetary metal. Again, more evidence of the monetization of gold, which is a huge + for gold.

    5) your article says:

    "there's little question that ample gold supply exists to meet current demand, "

    Maybe the most correct thing in it. There is no such thing as not enough gold, only not enough gold at the current price.

    "the market's coming off four straight quarters of oversupply. Given that, it's actually quite impressive the metal managed to rally $200 since last March."

    The author agrees we have been in a period of oversupply (whatever that means), yet notes Gold went up @ 18%. Using the author's tortured logic, what happens when there is no longer "oversupply", which the author contends we have had recently but which will not last.

    Furthermore, the article makes a big gold proponent's point. This is that that a big supplier to meet the investment demand for gold, the GLD ETF, doesn't seem to hold all the gold it should be holding given the price action of its shares outstanding.

  5. Joe, as usual your observations are 100% spot on.

  6. [Budget deficit sets record in February]
    "WASHINGTON (AP) -- The government ran up the largest monthly deficit in history in February, keeping the flood of red ink on track to top last year's record for the full year."

    Its all Greek to me.