Koos Jansen
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Koos Jansen
Posted on 27 Jun 2014 by

Jim Rickards: No Exit For The Fed

Written by Jim Rickards

The Federal Reserve, the central bank of the U.S., is nearing the end of its ability to manipulate the U.S. economy without producing consequences worse that those it set out to avoid in 2008. The Fed has no good exits from seven years of market manipulation. If it continues its current policy of reducing purchases of assets, the so-called “tapering,” it risks throwing the U.S. into a recession. If it reverses course and pauses the taper and later increases asset purchases, it risks destroying confidence in the dollar among foreign creditors of the U.S. Both outcomes are potentially disastrous, but there are no good outcomes on the horizon. This is the result of manipulating markets to the point where they no longer function as markets providing useful price signals and guiding the efficient allocation of capital. Today markets are a mirage, created by the Federal Reserve, which is caught in a prison of its own device.

Fed Is Wrong about Recovery

Since 2007, the Fed has tried to revive the U.S. economy through monetary ease. It began with a series of interest rates cuts, but by late 2008 interest rates had effectively reached zero and the Fed resorted to money printing, called quantitative easing or “QE” as a way to continue to stimulate nominal growth and aggregate demand. The money printing is done by purchasing bonds from banks and paying for the purchases with money that comes from thin air. This money printing has continued in three programs over six years called QE1, QE2 and QE3. The most recent program, QE3, began in September 2012 and was open-ended as to duration and the amount of bonds being purchased.

By late 2013, the Fed’s balance sheet has swollen to over $4 trillion due to the money printing. Because U.S. growth appeared to be stronger in late 2013 and the unemployment rate had fallen sharply, the Fed began to reduce the rate at which it printed money. This was the “taper” of asset purchases. However, the data on which the Fed relied was highly misleading. U.S. growth had been propped up by inventory accumulation. The declining unemployment rate had been caused not by job creation but by people dropping out of the labor force.

In fact, the Fed had not tapered into economic strength, it had tapered into weakness. This quickly became apparent when U.S. growth in the first quarter of 2014 showed a decline and as the U.S. labor force continued to shrink. Many other negative signs appeared including weak retail sales, declining real wages, lackluster consumer confidence, and a cooling-off in the housing market. In short, the U.S. economy was showing signs of sharply declining growth if not outright recession.

federal reserve

Why Tapering Is Nothing New & Why the Fed Needs To ‘Untaper’

This should not have come as a surprise. Those who focused on the tapering in December 2013 did not recognize that the Fed had tapered twice before. The end of QE1 in June 2010 was, in effect, a 100% taper. The end of QE2 in June 2011 was also a 100% taper. So, the famous taper of December 2013 was actually the third time the Fed had tried to withdraw from money printing. The first two times were failures as evidenced by the fact that the Fed had to launch new money printing programs after each withdrawal. By early 2014, it appeared that the taper of QE3 would also be a failure.

Depending on economic data in coming months, the Fed may have to pause the taper before it is completed late in 2014. Even if the Fed does not pause the taper but completes the process of reducing new asset purchases to zero, it appears likely that the Fed will have to increase money printing in 2015 in what will no doubt be called QE4. The U.S. economy has not shown an ability to achieve self-sustaining growth, so continued Fed money printing is needed to keep the economy growing at all.

Monetary Expansion Comes at a Price

But money printing carries its own risks. Foreign creditors of the U.S. are watching the Fed’s money printing closely and are visibly uncomfortable. Major creditors such as Russia and China are taking steps to insulate themselves from the potential for inflation in the near future if the Fed’s QE money printing programs continue.

Treasury data shows that net foreign purchases of U.S. Treasury debt have dropped sharply over the past year. Russia has been dumping U.S. Treasury debt since late 2013, partly as a result of fear of U.S. economic sanctions and partly out of concern about the fate of the U.S. dollar. Both Russia and China have been buying enormous quantities of gold to hedge against possible U.S. dollar inflation.

Koos Jansen
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  • Zhang An Ping

    In other news: Tutankhamen is dead

    • john smith


    • http://google.com/+TiongHumSoh Tiong Hum Soh

      In other news, Ben is balding.

  • H. Craig Bradley


    It has been demonstrated that gold is not a good hedge or protection from inflation in the long term. It can spike in the short term and day traders can and do make money, but just holding bullion itself is not a good hedge like people seem to want to believe. However, gold is a good hedge against crisis, be it financial or geopolitical ( Middle East). Market perceptions counts for a lot.

    Real estate is not good protection from inflation either. Real estate appreciated an average of 8% a year from 1971-1980. Inflation averaged the same amount, so it was a wash. Clearly, just buying real estate did not get you ahead of inflation. In fact, nothing fully protects against high inflation ( 10% or more) except being in some other currency; one that is more stable. That would NOT be the Euro, Pound, U.S. Dollar, Peso, or Yen in the long term. Better think Asian. Its a real guess who will win out in the end of this cycle.

    By the way, “lackluster consumer confidence, and a cooling-off in the housing market”. Right now, the housing market in Southern California is red hot. In fact, on my street, closing prices are back to the previous high seen in Sept. 2006. The cycle seems shorter this time around. Consumer confidence was just reported at 85, which is pretty high ( strong), especially in the face of -2.9% GDP in 1st Quarter, 2014 and with inflation picking up somewhat to 2.1% ( official number, not real one). So, we have stagflation with confidence. That’s a new one for me. Clearly the consumer is not informed or is just feeling Jolly.

    • Joe

      I agree with you. However you better sell your house since it’s one of the only ones with a HIGHLY appreciating price. I know there are about 10 very small areas in the US where prices are near there all time highs. Most are still 20-40% down.The average consumer and voter is dumb as dirt. Gold and Silver are better than paper money. So is your house if it’s not taken from you.

    • john smith

      hmm… can you explain why you think gold (or silver) is not a good hedge against inflation? You stated that as if it were a fact but did not back it with any logical argument. My understanding, based on the numbers over the last 5000 years, is that, in fact, gold IS a great hedge against inflation granted you can wait for the price manipulators to lose at their game long enough to have it revalue appropriately.

    • http://google.com/+TiongHumSoh Tiong Hum Soh

      Hi folks, just sharing my 5c worth: IS GOLD AND SILVER THE RIGHT THING WHEN SHTF? https://plus.google.com/106486977428529630681/posts/T7UfnCcjykk

  • Michael Yates

    They said they would kill the dollar, and that’s exactly what they’re doing. What they failed to mention was that they would do it by acting like desperate schoolkids trying to make recess last 5 minutes longer.

  • TeaT

    If Russia has sold US Treasuries, who has bought them and on what currency? Dollars, euros, gold?

    • Zhang An Ping

      US Treasuries are denominated in US$; that’s what you have to settle them with. If you own e.g. €uros, you need to sell these first for US$, and then buy your bonds with the proceeds.

      As with all propaganda, these stories – and the Talking Head sockpuppets who regurgitate them – are self-reinforcing, and if you repeat them often enough, sooner or later people start to ‘tune in’ and accept them. To see just how insidious and subtle this can be, take a look at e.g. http://rt.com/news/169124-faceebok-users-emotions-experiment/

      Similarly, the notion that China is in any way “hedging” against the US$ is patently absurd: China has somewhere in excess of $3 trillion of foreign currency assets – to hedge that at $1300 / oz they would need to hold close to 72,000 tons of Gold, and despite being slightly bullish on Gold in general and China in particular, I don’t think they do

      • In Gold We Trust

        What are other blogs/sites you read covering gold and macro-economics Zhang? I’m interested in different perceptions than “the ones we know”.

        • The_Spanish_Inquisition

          The majority of my short-term opinions are based on daily conversations with other Risk Managers – though these tend to be in Wholesale markets, and I do not talk to Wealth Managers or anyone on the Retail Investments side

          Professionally I have live feeds from Bloomberg, Reuters and Markit, and in the course of my work I receive regular analyst bulletins from e,g. Bank of America Merrill, HSBC and Standard Chartered; but to be honest, not much of that relates directly to commodities. I am also a Member of the Association of Corporate Treasurers and of 2 other professional Risk Management associations

          For Bullion news I read Kitco’s headlines, Monetary Metals and Trader Dan Norcini – and Kid Dynamite for some light entertainment. I scan KWN for absurdity and each morning skip through the previous day’s Zerohedge. I no longer read Jesse and I certainly dont read Silverdoctors or Goldcorp, though I do still keep an eye on Mike Maloney’s “Hidden Secrets of Money”**

          For day to day news – other than the Bloomberg drip-feed – I read the BBC, the South China Morning Post (which is better than the Straits Times) and RT.com I have hard copy subscriptions to The Economist and Private Eye, but these arrive 10 days late. I also occasionally read Globalresearch.ca and Atimes.com

          For Chinese affairs I subscribe to Sinocism.com (though Bill has gone “a bit special” recently) and to a WordPress blog named South Sea Conversations written by some Australian-Chinese guy named Andrew. I only refer to Xinhua and/or Global Times when researching specific topics

          I am an information junkie, and tend to reject / disagree with at least 70% of what I read – rising to over 100% where the source is “an industry expert” or anyone directly associated with retail bullion sales (*** this is where Mike Maloney comes unstuck)

          I write variously as Zhang An Ping, PostcolonialBrit and The_Spanish_Inquisition depending upon which device I am logged in on- this is a Samsung Tablet, and I am on a bus in the suburbs of Singapore.

          • In Gold We Trust

            That’s interesting. Too bad I’m dyslectic ;-)

          • Zhang An Ping

            so is my daughter

      • ramu

        When gold is monetized, $1300 per oz price is absurd. So China doesn’t need 72000 tons of gold. Even $5000 per oz will be too low, and that means 72000 ton is now down to 18000 tons. Realistic price is around $10000 per oz. or even more and that brings down China gold requirement to 9000 tons. That is realistic. Then, as Jim Rickards said, they have to decide what they want to match with gold, M1 or M2 or M3 or money supply. The highest price was $47000 per oz. So the $1300 price and 72000 tons argument is absurd.

        • The_Spanish_Inquisition

          Absurd – and The Real World, rather than your banal fantasies

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