By: Peter Schiff, CEO of Euro Pacific Capital
-- Posted Friday, 14 December 2012 | | Source: GoldSeek.com
By
upping the ante once again in its gamble to revive the lethargic
economy through monetary action, the Federal Reserve's Open Market
Committee is now compelling the rest of us to buy into a game that we
may not be able to afford. At his press conference this week, Fed
Chairman Bernanke explained how the easiest policy stance in Fed history
has just gotten that much easier. First it gave us zero interest
rates, then QEs I and II, Operation Twist, and finally "unlimited" QE3.
Now
that those moves have failed to deliver economic health, the Fed has
doubled the size of its open-ended money printing and has announced a
program of data flexibility that virtually insures that they will never
bump into limitations, until it's too late. Although their new policies
will create numerous long-term challenges for the economy, the biggest
near-term challenge for the Fed will be how to keep the momentum going
by upping the ante even higher their next meeting.
The
big news is that the Fed is now doubling the amount of money it is
printing. In addition to its ongoing $40 billion per month of mortgage
backed securities (to stimulate housing), it will now buy $45 billion
per month of Treasury debt. The latter program replaces Operation Twist,
which had used proceeds from the sales of short-term treasuries to
finance the purchase of longer yielding paper. The problem is the Fed
has already blown through its short-term inventory, so the new buying
will be pure balance sheet expansion.
To
cloak these shockingly accommodative moves in the garb of moderation,
the Fed announced that future policy decisions will be put on automatic
pilot by pegging liquidity withdrawal to two sets of economic data. By
committing to tightening policy if either unemployment falls below 6.5%
or if inflation goes higher than 2.5%, Bernanke is likely looking to
silence fears that the Fed will stay too loose for too long. While these
statistical benchmarks would be too accommodative even if they were
rigidly enforced, the goalposts have been specifically designed to be
completely movable, and hence essentially meaningless.
Bernanke
said that in order to identify signs of true economic health, the Fed
will discount unemployment declines that result from diminishing labor
participation rates. It is widely known that a good portion of
unemployment declines since 2009 have resulted from the many millions of
formerly employed Americans who have dropped out of the workforce. But
like many other economists, Bernanke failed to identify where he thinks
"real" employment is now after factoring out these workers. So how far
down will the unemployment number have to drift before the Fed's
triggering mechanism is tripped? No one knows, and that is exactly how
the Fed wants it.
A
similarly loose criterion exists for the Fed's other goalpost -
inflation. Bernanke stated that he will look past current inflation
statistics and look primarily at "core inflation expectations." In other
words, he is not interested in data that can be demonstrably shown but
on much more amorphous forecasts of other economists who have drunk the
Fed's Kool-Aid. He also made clear that rising food or energy prices
will never fall into the Fed's radar screen of inflation dangers.
For
as long as I can remember (and I can remember for quite some time) the
Fed has stripped out "volatile" increases in food and energy, preferring
the "core" inflation readings. But in the overwhelming majority of
cases, the headline numbers are significantly higher than the core. In
other words, Bernanke simply prefers to look at lower numbers. In his
press conference, he made it clear that the Fed will avoid looking at
price changes in "globally traded commodities," that are all highly
influenced by inflation.
These
subjective and attenuated criteria give Fed officials far too much
leeway to ignore the guidelines that they are putting into place. If the
Fed will not react to what inflation is, but rather to what it expects
it to be, what will happen if their expectations turn out to be wrong?
After all, their track record in forecasting the events of the last
decade has been anything but stellar.
The
Fed officials repeatedly assured us that there was no housing bubble,
even after it burst. Then they assured us the problem was contained
to subprime mortgages. Then they assured us that a slowdown in housing
would not impact the broader economy. I could go on, but my point is if
the Fed is as spectacularly wrong about inflation as it has been about
almost everything else, will they be able to slam on the brakes in
time to prevent inflation from running out of control? And if so, at
what cost to the overall economy?
The
Fed is committing to more than a $1 trillion annual expansion in its
balance sheet, an amount greater than the total size of its balance
sheet as late as 2008. Most forecasters believe that the Fed will have
$4 trillion worth of assets on its books by the end of 2013, and perhaps
more than $5 trillion by the end of 2014. If conditions arise that
require the Fed to withdraw liquidity, the size of the sales that would
be required will be massive. Who exactly does the Fed believe will have
pockets deep enough to take the other side of the trade?
As
the biggest buyer of treasuries, it is impossible for the Fed to sell
without chances of collapsing the market. Surely any other holders of
treasuries would want to front-run the Fed, and what buyer would be
foolish enough to get in front of the Fed freight train? The bottom line
is that it is impossible for the Fed to fight inflation, which is
precisely why it will never acknowledge the existence of any inflation
to fight.
But
perhaps the most absurd statement in Bernanke's press conference was
his contention that the Fed is not engaged in debt monetization because
it intends to sell the debt once the economy improves. This is like a
thief claiming that he is not stealing your car, because he intends to
return it when he no longer needs it. To make the analogy more accurate,
there could not be any other cars on the road for him to steal.
Without
the Fed's buying, it would be impossible for the Treasury to finances
its debts at rates it can afford. That is precisely why the Fed has
chosen to monetize the debt. Of course, officially acknowledging that
fact would make the Fed's job that much harder. Without the monetization
safety valve, the government would have to make massive immediate cuts
in all entitlements and national defense, plus big tax increases on the
middle class.
As
I wrote when the Fed first embarked on this ill-fated journey, it has
no exit strategy. The Fed adopted what amounts to "the roach motel" of
monetary policy. If the Fed actually raised rates as a result of one of
its movable goal posts being hit, the result could be a much greater
financial crisis than the one we lived through in 2008. The bond bubble
would burst, interest rates and unemployment would soar, housing prices
would collapse, banks would fail, borrowers would default, budget
deficits would swell, and there would be no way to finance another round
of bailouts for anyone, including the Federal Government itself.
In
order to generate phony economic growth and to "pay" our country's
debts in the most dishonest manner possible, the Federal Reserve is 100%
committed to the destruction of the dollar. Anyone with wealth in the
U.S. dollar should be concerned that economic leadership is firmly in
the hands of irresponsible bureaucrats who are committed to an ivory
tower version of reality that bears no resemblance to the world as it
really is.
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