Fed Tapering QE and the Price of Gold

fed tapering qe - the monster gets his revenge

If the threatened Fed tapering QE comes to pass, how will the price of gold be affected and what is the rational response of the individual trying to survive in the wacky world of a centrally planned US economy?

Should the government side with the devil, (let interest rates rise), or just dive into the deep blue sea, (keep monetizing new debt)? Either choice ends the same way – high inflation, more municipal defaults like Detroit, an economy that grinds eventually to a halt and – barring a miracle – either the default of the US government or a Big War to distract everyone. (Followed by the default of the US government once the shooting stops.)

What a choice, huh?

Here’s some of the factors our Overlords are dealing with daily:

Gold Down/Gold Up

Gold was down a bunch in April in response to someone selling 500 tons in one fell swoop. It was down a bunch more in May. The direction is now reversed. Gold is up this morning a bunch, up 10% in the last month. Can you say “volatility”? There, I knew you could do it.

QE or Taper

The Fed is dumping $85B a month into the equities markets via banks through their QE program for almost 2 years now. They are threatening to stop, or at least “taper” that program sometime soon. If the Fed stops QE, the bull market comes to an end. If the Fed keeps QEing, they will eventually own ever bond, mortgage and IOU in the world. They’ve already quadrupled their balance sheet in the last 5 years. That can’t end well.

Interest Rates vs. Inflation Rates

The official inflation rate is higher than interest rates, though not by much. Long bonds are at historically low yields. In the primary market, yields are actually below the inflation rate. Savers have almost no incentive to save in this market because the return on savings is negligible.  In real terms, the return on savings is negative – as anyone who actually pays for groceries, gas and housing has noticed.

Good Dollar / Bad Dollar

The US Government needs a weaker dollar, because its debt is denominated in dollars. But every other central bank on the planet has the same need – weaker currency. This is the reason for the infamous “race to the bottom.

The government is caught between a rock and a hard place. It’s run up debts that can’t be paid in current dollars with current growth. It needs more growth and a weaker dollar to pay the debt. But growth has to be organic, and the Fed is not allowing that. Growth requires investment, investment requires capital reserves, capital reserves demand higher interest rates, higher interest rates will create a stronger dollar and will also make it even harder to pay dollar-denominated debts.

So the game the Fed and the US government are trying to play is to stimulate growth in the absence of any of the factors that historically stimulate growth. Or, as my friend The Fearsome Pirate said, “centrally planning markets is impossible.”


Long gold.

Prices of gold are still well below where fundamentals say they should be. But I’d be buying – and taking delivery of – physical, not this goofy-ass paper stuff.

Monetary Froth, or How Inflation Deceives Us

Inflation in the US deceives us. Here’s an example.

The two charts below show the S&P 500 monthly closing prices since 1950. The first chart is in raw dollars; the 2nd chart is adjusted for inflation and shows the value of the S&P500 in 2012 dollars.

(I used the BLS’s inflation calculator to do the adjustment. Both charts are logarithmic and use base 10.)

The top chart appears to depict an economy which has been steadily growing, albeit with a few bumps and hiccups along the way. The bottom chart demonstrates that the economy’s growth is not really as steady as we’ve been led to believe and in fact is mostly illusion.

From the high around 1968, (bottom chart, blue arrow), to the low around 1983, the SP500 declined in real terms to levels not seen since 1955. We didn’t recover 1968-level valuations until the early 90s, and didn’t start gaining over those levels till 96. Then we returned to the mid-90s level valuations in 2002 and again in 2008.

The growth periods were from the end of the war till 68, and from 94 to 2000. Everything else is smoke and mirrors.

You can see the economy attempted to recover the 1968 high in the 72-73 time period, but Nixon decoupled the dollar from gold, thus unleashing the hounds of inflation for the next 20 years. The internet boom seemed to result in real growth in the late 90s, but we crashed back to those 68 levels in 2002 and below them in 2008.

Starting in 2001, the Fed lowered interest rates 14 consecutive quarters, driving money out of the bond markets and into equities. When the Fed-induced housing bubble burst in 2008, the Fed then dumped trillions of dollars into the coffers of the Too Big To Fail banks. When that failed to get the economy going, they repeated the folly of the 2002 recession and lowered interest rates back to essentially zero, again detroying the Bond Market and driving money back into equities.

The only actual economic growth this country has experienced since the end of WWII are the years from the end of the war till 1968, plus a little bit of growth in the late 90s. Everything else has been monetary froth.

Bankers Gone Wild

Fearsome Tycoon over at Jerkonomics had a very insightful piece this week:

The problems with the American banking system are structural and primarily stem from the Federal Reserve System and Depression-era safeguards. Without going into great detail (which would be a book, not the rather long blog post this is turning into), the purpose of the former is to enable bankers to profit without raising legitimate capital, and the purpose of the latter is to prevent anyone from having to suffer the consequences of bad financial decisions. Because these are formal, structural problems, they are always going to cause massive financial problems unless the financial sector is simply strangled (which we also don’t want–banking is an essential part of a money economy). Regulation simply can’t catch up.

Read the rest at Jerkonomics…


In our never-ending quest to enlighten, inform and educate, we present today’s lesson on that elusive creature known by the common name “Quantitative Easing”. (Its scientific name is Monetary Inflation.)

Q. What is Quantitative Easing, colloquially referred to as QE?

A. QE is the name for what a Central Bank (CB) does when it creates money out of thin air.

Q. What do you mean by this phrase “creates money out of thin air”?

A. The best way to understand this is to compare it with something you already know about.

When you or I want to buy stuff, we give money to the seller in exchange for his stuff. We get our money by trading our stuff to someone else for their money. That’s how the money system works for everyone but the Federal Reserve. When the Federal Reserve wants to buy stuff, they just create the money out of thin air rather than earning  it like everyone else has to. Its a pretty sweet gig, but you gotta be connected to get that job. And you’re not connected.

Q. What limits the amount of money the Fed can create?

A. Nothing.

Q. Is it legal to buy stuff with money you create out of thin air?

A. Only if the Fed does it. If anyone else tries to do it, it is called “counterfitting” and they put you in jail.

Q. That sounds like a pretty sweet deal. Why is it legal for the Fed to do it and not me?

A. Because the people who own the Fed are morally, intellectually and spiritually superior to all the rest of us.

Q. So how much Quantitative Easing has the Fed done?

A. Since September 2008, the Federal Reserve has created about 1.2 trillion dollars out of thin air. Prior to that date, they had created a total of $800 billion in total since the bank came into existence in 1913. This chart of “QE” is from the St. Louis Fed.

Adjusted Monetary Base

Q. You mean it took them 95 years to create $800 billion and less than 2 years to create another $1.2 trillion?

A. Yep. That’s what we mean.

Q. So what are they using all that money for?

A. To buy stuff from the government and from the big banks that the government bailed out in 2008.

Q. Huh?

A. The government “loaned” money to the banks because they banks had billions in crappy investments like sub-prime mortgages and CDOs. The banks took that money and put it into the stock market. The market went up because there was so much “free” money from the government sloshing around. The bankers paid themselves big bonuses because they made so much money in the stock market using money the government “loaned them”. Then they sold their crappy investments to the Federal Reserve for 100 cents on the dollar.  The Fed didn’t care how much it cost because they can create money out of thin air. The bankers are rich, safe and free to continue being criminals. The government is deeper and debt, the Fed owns the title to trillions of dollars worth of land and buildings and Joe Six-pack is so confused that just hope it all changes for the better. That’s what we call “Hope and Change”.

Q. That seems like a scam. Is that a scam?

A. That’s a scam