Stocks settled down yesterday. The Dow dropped 40 points. Either the market had already priced in “QE forever”… or investors are starting to wonder.
Maybe an economy with falling household incomes is not a good place to own stocks. Maybe an economy that is barely growing doesn’t justify the highest stock prices of all time. And maybe the Fed’s $85 billion a month bond-buying spree doesn’t work…
Economists, analysts and advisors have been trying to figure out exactly what QE does. The Fed is adding more than $1 trillion to the monetary base every 12 months. It’s got to have some effect, right?
In theory, it goes into banks’ excess reserves… which, in theory, the banks could lend out at a ratio of 10-to-1… for a total potential increase to the money supply of $20 trillion.
But it’s not that simple. These are excess reserves at the Fed we’re talking about. Some experts insist these reserves are untouchable in the financial caste system and they add nothing to the money supply. They say QE is an asset swap (interest-paying excess reserves for interest-paying Treasury paper), not an additive process.
But it’s not that simple either. The Fed creates money. It buys Treasury bonds from the banks. The banks buy more Treasury bonds. This transfers cash from the Fed to the federal government. And it saves the federal government having to get it from other sources (at higher rates of interest).
All money, like water, eventually finds its way to the sea – occasionally washing away a few houses along the way. And when you add $1 trillion a year into a $16 trillion economy, it’s bound to raise the sea level.
How? When? We don’t know… but we’d avoid property too close to the shoreline!
The big news today is in the gold market. The price of gold has gone up more than $100 since the Fed announced it would not be tapering its bond buying.
Why?
Because gold is waterproof. No kidding. When the broad ocean of cash, credit, and connivance breaks into open fury – with howling winds and towering waves – gold will stand tall and sure, like an indestructible lighthouse.
No financial wind blows it over. No drenching rain warps it. That’s why smart investors… and smart central banks… are watching the weather and accumulating gold.
Gettin’ the Heebie Jeebies
Gold is “Fed-proof” too…
The Fed’s announcement this week, according to the press, came as a surprise. No one should have been surprised. This is an economy that has come to depend on Fed stimulus.
Every time the Fed has hinted that it might… possibly… at some time in the future… unless it changes its mind… and the creek doesn’t rise… reduce its interference, the markets get the heebie jeebies.
Since the purpose of the Fed’s action is to avoid the heebie jeebies, they are now trapped by their own clumsy meddling. They broke it. Now, they own it.
What can they do with it? Perhaps this is a good time to answer our critics. As you know, we have announced our availability to run the Fed. If selected, we promise to be derelict. We will abdicate immediately… shirking our responsibility completely. As you can probably imagine we’re still waiting for the phone to ring.
C’mon, Barack. We’re in Paris now. Yes, the US government is a little short of funds. But surely you can afford one long- distance call.
Prisoners of the Fed’s Actions
But at least one dear reader believes our plans for the Fed are completely unrealistic and downright irresponsible. We’ll let him explain:
Bill, you would have to be a Luddite to believe what you say. Your way will be totally catastrophic, everything, everything has moved on, we cannot go back, should it be that you head the Fed.
I am not saying for a moment I like where we are, or that the banks are not making things worse, they plainly are. But in order to keep people working, you need to rely on the velocity of money, period.
Our reader goes on to tell us that we too are prisoners of the Fed’s actions… and of the paper money system. There’s no way out now… not without hell to pay.
And guess what? He’s right. There is hell to pay. But we guarantee you, dear reader, hell will collect… whether we like it or not. And the bill won’t get any smaller the longer we dodge the bill collector.
Look, what’s the real point of our current paper money, Fed-managed system? It is so that the insiders can manipulate, obfuscate and confiscate.
They manipulate the value of our money, lie about what is really going on and steal wealth from savers and workers to pay for their pet projects and give money to their zombie friends. That’s the way it has always been and shall ever be, amen.
For example, Charles de Gaulle’s economist, Jacques Rueff, explained why inflation seemed to boost employment. It was because inflation robbed the workers of their wages… lowering labor costs… and making it easier for employers to hire them.
And Marc Faber explained, just two days ago, how QE robs more than 90% of the population to pay off the elite. Where does all the Fed’s QE liquidity go? It goes into stock prices! Who makes money when stock prices rise? Wall Street and its elite clients! Everybody else loses.
And what about the zombies?
We’ll explain that part of it ourselves. The Federal government borrows the Fed’s ersatz dollars at record low interest rates. What happens to the money? Does it go to the taxpayers? Does it go to real, productive businesses… or to real, productive workers?
Nope.
It goes to zombies of all sorts – to the 7 out of 10 families who get more from the government than they pay in taxes… and to all those contractors we passed along the Dulles Corridor on our way to the airport.
QE is a Zombie Enrichment Program. The sooner it ends… and the sooner the Fed is abolished… the better off we all will be.
Market Insight:
The End of “Peak Oil”
From the desk of Justice Litle, Editor, Strategic Wealth Report
On Wednesday, I shocked some Diary readers when I said that “Zombie America” was no match for “Dynamic America.”
This opened quite the can of worms….
Reader feedback boiled down to three assertions:
- I over-estimated the advantages of a US energy boom
- I overlooked the dangers of an Obama presidency
- I under-estimated the problem of bloated government.
Let me deal with each of these assertions one by one… I’ll deal with the first today. And with the other two next Monday and Wednesday.
I used to edit Outstanding Investments, a natural resource investments letter. Under my stewardship Outstanding Investments received top-performance honors from Hulbert Financial Digest.
I spent a lot of time studying energy dynamics back then. And, like many others during that time, I was convinced of the threat of peak oil.
The US is the mightiest wealth-creation machine in the history of man. This great engine needs fuel (energy) to keep it running. This made oil addiction the Achilles’ heel of the American empire.
Not so long ago, America’s thirst for oil cost her dearly in blood and treasure. We were paying through the nose for it… fighting expensive wars over it… wrecking budgets over it.
If peak oil’s dire predictions were true, the US was truly doomed. Our Achilles’ heel would lay us low. The mighty engine would seize up. You just can’t run a mighty machine without viable fuel any more than a Ford F-150 can do its job without gasoline.
But then the shale boom happened… US energy production boomed… and Hulbert was proven wrong. Talk of “Saudi America” started to become normal. Peak oil ceased to exist as a viable concept.
And thus the one existential threat to American dominance – the only true threat – went away.
Peak Oil Is Now a Memory
You have to understand that America is a juggernaut. This was apparent from the early days of the 20th century.
The competitive advantages that made America great all throughout the 20th century have not gone away. If anything, those advantages are more potent than before.
It was only peak oil that threatened to break America’s stride. And peak oil is now a memory.
That is why the energy boom is a game changer.
The US was already on a trajectory of greatness set to extend well into the 21st century. Starting with the OPEC-induced oil crisis in the 1970s, an energy shortage threatened that run, enabling America’s geo-political adversaries. Now that threat is gone.
Take Syria, for example. Syria is a massive embarrassment – a black eye for US foreign policy.
But does Syria matter?
Not really.
If anything, Syria was a positive example of learning from past mistakes. The American people soundly rejected the idea of military intervention. Had the vote gone to congress, the Obama administration would have lost resoundingly.
Why?
Because thanks to the painful lessons of Iraq, Americans now understand the folly of “nation building” and foreign policy adventurism. We have wised up to such foolishness.
Better still, we don’t need to fight wars for oil any more. That’s big. The geo-political price tag for energy security is going to fall dramatically in the future… even as the cost to run America’s military, primarily expensive in terms of energy, falls significantly. That is an amazing thing.
Meanwhile, domestic energy is revitalizing American competitiveness. America is projected to become the lowest cost manufacturer in the Western world in the next few years.
This means more jobs coming back to the United States. It means more chemical and manufacturing companies setting up shop in the low-cost Midwest to take advantage of cheap natural gas and an educated workforce.
If you ignore these things, you ignore what is truly important. You miss the dynamic forest for the zombie trees. That’s a mistake.
Tune in on Monday for my answer to readers who believe I’ve overlooked the dangers of the Obama presidency…