QE + Desperation = Higher Gold Prices


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The Setup

A century ago bankers created the plan for a U.S. central bank, bought enough votes to get it passed into law, encouraged deficit spending, government debt, and extracting the interest payments from taxpayers. The process has worked well for the bankers.

After several expensive wars and the expansion of social programs the U.S. had created considerable debt. In fact, debt and the money supply had increased so much that inflation became a serious problem in the 1960s. Further, the U.S. trading partners no longer wanted dollars but wanted gold instead since they could see that dollars were being created indiscriminately and were losing their value. Nixon (August 15, 1971) did what was good for the financial industry, severed the remaining connection between the dollar and gold, allowed the money supply and debt to increase to never-seen-before levels, and planted the seeds of self-destruction for the dollar and the US economy.

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The Crash

The process continued until 2008 when the debt and derivatives bubbles had grown so massive that the economy could no longer sustain them. The economy and stock market crashed and financial and political leaders stared “into the abyss” of deflationary collapse, reduced Wall Street income and bonuses, loss of votes, and did what they perceived as necessary: printing money, Quantitative Easing (QE), injecting liquidity, bond monetization, extend and pretend, and so on.

The “Solution”

The choice was made to “solve” an excessive debt problem by creating more debt – Quantitative Easing (QE) and increased deficit spending. Deficits were increased to a $Trillion or so per year while the government bailed out the bankers and politicians and the public watched Reality TV. It appeared to work, somewhat, for a while.

As Bill Bonner says:

“With regards to QE, the poles of possibility are as follows:

  1. QE does nothing important. If this were so, there would be no reason to keep it.
  2. QE is essential to the economy. If this were so, they couldn’t get rid of it… no matter what the jobs report says.

Most likely, QE lies somewhere in between…”

So the economy (financial industry) and government are desperate for QE, and similar to being hooked on “meth,” they find it difficult to kick the habit and get off the “drugs” of QE, money printing, and central banking. As Gold Stock Bull says,

“The economy is addicted to QE and reliant on central bank stimulus to stay afloat. The world now understands that the FED cannot end the bond-buying program and has no intention of doing so anytime soon. If anything, we are likely to see increased quantitative easing in the future, just as a drug addict must up their dosage in order to have the same impact. This monetization of debt increases the bullish outlook on gold, as the gold price has historically trended higher along with the FED balance sheet.”

But how much QE? Surely it must stop sometime! Maybe not! What does the Fed say?

Michael Pento:

“This is from the interview at CNBC: “Does the Fed have a limit to its balance sheet? Charlie, is there a limit? You are headed towards $4 trillion. Could it be $5 trillion? Could it be $12 trillion? What limits the size of the Fed’s balance sheet?” And here is the answer from the Fed President Charles Evans, who happens to be simpatico with Janet Yellen and Ben Bernanke:

“Well, I think the Fed needs to do whatever is necessary to help meet our dual mandate objectives. I don’t really think about it as far as limits are concerned because I think there is a tremendous amount of capacity. We can go as long as necessary.”

“That’s not me saying it, that’s not King World News saying it. That comes, as they say, ‘From the horse’s mouth.’ This is a watershed moment in the Fed’s history. I’ve been saying it for many, many months, if not years, and you’ve been saying it on your network, Eric — that the Fed’s QE program is without end. It’s interminable. And now we have the Federal Reserve admitting that there is no limit, no dollar amount restriction, as to how high they will take the Fed’s balance sheet.”

So the Fed must continue QE and probably will increase the monthly purchases of bonds to delay deflationary forces, fund the government, levitate the stock market, and prevent another crash. This is desperation!

Marc Faber and Deepcaster:

“The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion], $200 [billion], a trillion dollars a month…”

“The Fed has boxed itself into a position where there is no exit strategy (and created) a colossal asset bubble…”

Continue QE and you get hyperinflation…”

“Halt, or even taper, QE and the markets crash.”

The picture, sans Fed propaganda, is increasingly clear. QE is necessary to supplement the financial industry and the voracious appetite of the U.S. government for more spending. Merely slowing QE will probably cause markets to crash, interest rates to rise, the government’s expense for interest on past debt will increase while tax revenues decline, and consequently the government needs more, not less, QE.

The thought that “there is no way out” should occur to us!

In fact, Richard Koo calls it the “QE trap.”

“Koo has been meeting with clients and officials in the U.S., and he says he hasn’t been able to find anyone to refute the theory that the U.S. economy is currently ensnared in the ‘QE trap’.”

Of course there is always a way out – the “nuclear” option – let it crash and burn! But no one wants a crash as everyone will be hurt by that choice. Consequently the Fed and the U.S. government (the powers that be – TPTB) scramble desperately. What are the options?

  • More QE buys time. Less QE might well cause a crash. So TPTB choose more QE.
  • More spending keeps the big corporations (who make LARGE donations to congress) happy. If the government spends less, “everyone” complains. So TPTB choose more spending, more deficits, and more QE.
  • Higher interest rates mean that the interest expense for the U.S. government increases. More interest expense means larger deficits and so TPTB are forced to choose more QE.
  • Foreign purchases (China, Japan, Russia, etc.) of newly issued U.S. treasury debt are decreasing while some countries are actually reducing their current holdings of treasury debt. This forces the Fed to be the “buyer of last resort” and purchase, via more QE, the debt that normally would have been purchased by China, Japan, Russia and others. Fewer foreign purchases necessitate more QE.
  • A weaker economy and fewer people employed means less economic activity, diminished tax receipts and larger deficits. Those larger deficits guarantee more borrowing and more QE.
  • Obamacare will create more government expenses and less disposable income for average Americans, which means less consumer spending and therefore less tax revenue for federal, state, and local governments. There is no choice here – it is already law and we are going DOWN that road to much higher consumer costs, lower government revenue, and more government control. The result will be a government desperate for more revenue and more QE.

It does indeed look like a “QE trap.” So ask yourself:

  • More QE will weaken the dollar, on average, because more supply indicates less value for each dollar. What will that do to consumer prices for food and energy when the inevitable inflation works its way into the consumer economy?
  • What will happen to the prices for gold and silver when the realization finally hits the populace that interest rates are rising, QE is here forever, congress will never balance the budget, and the dollar will continue to weaken. (Hint: There is no fever like gold fever.)
  • It is clear that other countries increasingly dislike the U.S. dollar, U.S. treasury debt, and the current policies of the U.S. administration. How much will the prices for imported oil, gold, and silver increase as a consequence of the above?
  • What will a dollar collapse do to the prices of gold and silver?
  • Knowing the policies of the Fed, the congress, the administration, and the inevitability of QE, do you own enough gold, silver, platinum, land, diamonds, collectible art and other non-paper assets such that you can sleep well at night?

Commentary from other astute writers:

Conclusions

The U.S. government has spent itself into the “no-win” position whereby more QE is both necessary and dangerous. Most current policies, such as congressional gridlock, inability to pass a budget for five years, Obamacare, weakening economy and tax receipts, declining relations with foreign nations, massive deficits, declining total employment, inability to reduce spending, ongoing wars, probability of future wars, and more, suggest that QE must continue and probably increase.

Stocks may protect you (read John Rubino above), but gold and silver are the safer choice given the inevitability of more QE and a potential dollar collapse.

You decide!

GE Christenson
aka Deviant Investor

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6 Responses to “QE + Desperation = Higher Gold Prices”

  1. therooster says:

    QE will continue until such time that precious metals are monetized and circulated. Circulating asset based currency purges debt right back to the nothingness it was created from.
    There are two ways that this can be done. Top-down or bottom-up. The problem and the challenge is that because precious metals have real-time floating values, the rate of change is critical in the migration from a debt based system to an asset based system. It’s because of the real-time vulnerability of the legacy system (USD) that a monetization process must be undertaken by the market, organically. It cannot be a top-down process. This is a dramatic shift for the paradigm of thought for most people. You cannot pour new wine into old wineskins. This particular beast must rise from the grass roots.

    • And this implies to me that you believe a rather traumatic adjustment process will be involved after the reset occurs and from which the new system must arise. I think you are correct.

      Thanks for your comment.

      GE Christenson
      aka Deviant Investor

  2. major says:

    The question is what kind of desperate action will the government take to prevent gold from going on a rampage and blowing the dollar out of the water? Confiscation? Massive market manipulation? I can guarantee they will try to divert the consequences of their stupidity to the innocent.

    • I agree with you. To add to your list, excess profits tax, government controlled gold markets, etc.

      On the other side, the big money may have converted much of their wealth into gold and may block such government action.

      GE Christenson
      aka Deviant Investor

  3. Bud Wood says:

    When a person looks at the degradation of purchasing power for just about all currencies during my lifetime, it simply means that currencies generally are worthless. But I still use the currency of the country in which I reside because it works.
    No, I am not equating national currencies with money, but as the man said as he fell past the 13th floor, “so far, so good”!

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