Fed Will Announce New & Improved QE
The Federal Reserve (Fed) has only just begun in the shenanigans it will employ to attempt to paper over the debt. Today’s post will give you a little of our thinking of what direction things could go in the future. We’ve spent most of the year making economic forecasts. The first half of the forecasts were about what might happen in 2012. So far, some are looking good while others are either waiting to be materialized or will be flat out wrong. The second half of our predictions were longer term in nature. These are things that we could see happening in 2012, but we could also see happening in the year or two to follow. We also said up front that we do not expect all of these things to happen. Most of them are wild predictions that are far outside of the norm. However, we do believe quite a few of these things will indeed happen.
Fed Will Announce New & Improved QE
We’ve timed this prediction right after the Fed decided to do nothing at its meeting this week. However, they did note that the economy is slowing and that some support might need to be given at some point in the future.
The Fed is in a tough spot. They see themselves as saviors of the economy who can turn the direction of the economy with the pull of a lever. The problem is, they’ve had no ability to accomplish what they’ve been trying to accomplish for some time. All of this was foretold by Austrian economists decades ago. We’ve come to the blow off top of the volcano and at this point, nothing much can be done. But the Fed thinks they can fix it even though their track record at understanding upcoming events is terrible and their ability to bring about desired outcomes has suffered terribly in recent years.
Another huge problem they face is that more and more of the world is waking up to the fact that what the Fed is doing is horribly dangerous and doesn’t work. Thus, their Quantitative Easing (QE) actions are becoming extremely unpopular. This makes it more and more difficult for them to create money out of thin air for the risk addicted bankers and the free spending government.
Yet, they can’t do nothing, can they? I mean, that goes against every principle of any self respecting government or Central Banker type! They must mettle. And to be fair, it would be hard to have your hand on the helm while the ship goes down while you do nothing, even if you know that doing something will likely make things worse.
So they will do something. What will they do? Here’s two theories that are based upon the idea that the Fed feels they must print up lots and lots of new money out of thin air to bring liquidity to the system without having to suffer too much of the ire of the masses who (even without fancy Harvard/MIT/Princeton Economics degrees) can intuitively understand that the idea is stupid.
So here are two ideas that are just different enough from what was done last time that the Fed might think will trick people into not understanding the inflationary consequences…
1) Negative Fed Funds Rate? Could the Fed actually charge banks interest to hold their funds for them? Are we reading too much into this paragraph from the statement released yesterday http://www.federalreserve.gov/newsevents/press/monetary/20120801a.htm …
“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”
Exceptionally low levels might simply mean that rates are kept where they are, but there has been some talk swirling that rates could go negative. If this were to happen, banks would feel much more pressure to lend money to anyone anywhere (which is what the Fed would be shooting for.) This one actually isn’t as bad as the next one in itself because the Fed probably shouldn’t be doing what they are doing now anyways. The problem comes from the fact that they’ve already blown up this balloon with their previous actions and this could cause the popping of said balloon.
2) Fed announces Nominal GDP Targeting (inflation + GDP growth) – This would mean that the Fed throws out its old manner of targeting inflation and spices things up a bit by adding the possibility of much more inflation to “fix things”. A simpler prediction would be that instead of shooting for 2% inflation, they decide to shoot for 3% inflation, as if that’s a good thing! But there are rumblings of that even though the Fed’s primary mandate is supposed to be “price stability” and inflation is clearly not stability, but erosion.
But the Fed could go all the way, by throwing out the pure target of inflation and instead target a mixed factor such as Nominal GDP. This would mean that they are shooting to grow the Gross Domestic Product (GDP) of the economy and they don’t actually care whether it is the economy growing or inflation happening. They purely care about the number that is produced. Thus if they are shooting for 5% nominal GDP, then 3% growth & 2% inflation would get you there just as well as 0% growth & 5% inflation would. The beauty of this idea in the Fed’s mind would be that once they get away from targeting a specific inflation number, they could much more easily ignore the fact that inflation is increasing while growth has been stagnating (and has been for decades). They’ve been changing the way they look at statistical numbers for at leaset 3 decades now (always to make the new numbers appear better than the old versions would have appeared), so this would not be anything new even though it seems horrific that they would try to pull this over on us.
To wrap up, we believe more QE is coming. However, we think it very likely that they wil try to call it something else in order to slip it by the public. If you’re going to throw expensive worthless ideas back into the face of the public, you better give it a new name that doesn’t sound like the old name which everyone but you seems to know doesn’t work!
This is the 30th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, 25) US Recession., 26) Currency War, 27) Deflationary Crash, 28) Hyperinflation& 29) Increasing Natural Disasters.