Ben Bernanke, the Federal Reserve Chairman, announced that the Federal Reserve would begin another round of quantitative easing known as QE3 (or informally as money printing). The Federal Reserve has decided to begin buying $40-billion in agency mortgage-backed securities every month starting Friday. They will also sell short-term bonds in exchange for long-term bonds to continue to drive down mortgage rates. With these purchases the Federal Reserve will buy monthly assets which will add up to an estimated $85-billion a month.
The news announced by Bernanke is what many economists are calling the “nuclear option.” And it likely means that the Federal Reserve recognizes that the economy is not getting better, and there is no positive news on the horizon. For instance, unemployment has remained above 8% for more than 40 months in a row.
What was also surprising to many economists is the promise the Fed made to keep this type of monetary policy active, even if the economy starts to recover. The Fed argues that this promise will encourage businesses and consumers alike who may be avoiding large purchases and investments because they fear a future rate spike.
Additionally, the Federal Reserve hopes their move will increase home prices and create “the wealth effect,” encouraging more home buying, home building and additional purchases. Unfortunately, not only does the government already own many of the mortgages, but the Federal Reserve’s move to print money, push up housing prices and encourage Americans to buy could simply create another housing bubble.
The Dow Jones rose with the Federal Reserve news, and it is now up to 13,584.31. What also spiked? The price of gold and silver, which indicates the American people recognize that this monetary policy is likely to lead to higher inflation rates and lower purchasing power for their cash.
Not everyone thinks this is a positive move. Peter Schiff of Euro Pacific Capital, claims the Feds move to keep the interest rate low has created an environment where it makes it impossible for you to place a realistic value on what you own. He declares that the last nail has been driven into the coffin of the U.S. dollar.
Schiff declares this new policy is “operation screw.” Anything valued in dollars will be devalued: wages, bond investments, saving accounts and cash. Bernanke declared this may be bad for savers, but it will be good for those holding stocks. What is more likely? This will lead to a monetary crisis for our country.
The Fed claims they will keep the interest rate low until they get job growth, but Schiff argues that the economy won’t improve by printing money. Schiff claims the Federal Reserve has one tool – a hammer- but the hammer may not be the appropriate tool for job creation, and the Federal Reserve’s policy of quantitative easing will simply raise the cost of living.
What does Schiff recommend? “My investment strategy is based on the Fed continuously doing the wrong thing,” Schiff said. “What you have to do is avoid U.S.-dollar denominated investments. People need to own precious metals like gold and silver, they need to own commodities, they need to own foreign bonds, foreign stocks.” Buckle up and prepare. It sounds like with Bernanke at the helm we are in for a bumpy ride!
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