Gold prices have taken another step up the price ladder, along with silver prices and the stock market in general. Oil prices actually just hit $100 per barrel again. The cause for such price jumping? Ben Bernanke has announced an aggressive, open-ended QE3 scheme that will be buying $40 billion of mortgage-backed securities from banks every month until… well, they didn’t tell us how long. Probably a while.
He also informed us that the ZIRP — zero interest rate policy — is still to keep interest rates low and falling until mid-2015. That’s essentially another 3 years. That’s going to create insane amounts of malinvestment. In 50 years, they’ll be looking back to these days and they’ll be wondering if Ben Bernanke had a mushroom habit, because these actions are delusional at best.
What This Means
Some people have contacted me asking if this means we’ll see hyperinflation soon. The answer is absolutely not — not unless something else happens, like congress decides to print money without debt-creation to spend it, or something like that. You can read more about my thoughts on hyperinflation in America. It’s just not in the cards right now.
QE isn’t literally printing money and dumping it in the market. They’re essentially buying assets and sitting on them. This could be seen more as a kind of bailout — an asset swap in the favor of the banks.
New money is printed, but that new money isn’t going into the system in the same way as if the Fed was printing $40 billion and sending it out to Wal-Mart shoppers or something. Instead, the money basically just sits in bank reserves, and the impact there is relatively minimal, because the system is already awash with cash.
Unfortunately, a bank’s reserves aren’t necessarily an indication of how much lending they do. Their reserves can increase 10,000%, but that doesn’t mean their lending will. So there’s new money… sitting there. It might be eventually lent out, but never in a hyper-inflationary manner. There’s essentially no way current Federal Reserve policy could create hyperinflation – or even really high inflation.
Why Did Prices Jump?
Prices still jumped on different assets… why? A good portion of it was based on everyone expecting prices to jump. Speculation, expected inflation, and the inevitable rush into physical commodities pushed prices up… but then they dropped soon after, and the claims of hyperinflation simply never materialized.
The reason is that the QE regemin of the Federal Reserve essentially prints money and takes assets out of the market. It’s an asset swap. They essentially allow the banks to delete some assets and replace them with dollar assets. This is more of a bailout than an inflationary binge.
This is important to understand. The Federal Reserve is bailing out the banks while claiming it’s for the overall economy. Every time they do this, the overall impact to the economy is just a short-term expectations jump — very convenient two months away from an election — but it’s not fundamentally ”helping” anyone but the banks.
Because of this, it doesn’t change the fundamentals of gold or silver too much for the very long haul. If you were buying, then keep buying. The world faces massive monetary structural problems, and no one has any answers — no one, except for those calling for a return to a free-market gold standard.
I realize this is different than what most writings on QE3 are about, but that’s fine — it’s true, and the problem is that sometimes people are more likely to believe the more exciting news rather than the more boring news.
As for the economic impact to QE3, it’s just allowing the banks to get away with more bad choices, and is delaying the inevitable. Nothing is fixed. The economy won’t get better because of this. And I think the Fed is starting to realize this. For those of us who believe in financial security, this is a great time to buy more gold and silver for the long haul.
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