President Obama successfully won re-election in November as a left wing progressive, who plans to tax the minority rich and redistribute their wealth to the needy majority. However, the harsh reality is speaker John Boehner and the Republicans still control the House of Representatives, and the U.S. government will reach the debt ceiling in December of 2012. While large tax increases, and cuts in defense are set to go off December 31, 2012, many assume a compromise will be worked out to kick the can down the road. Republicans will resist large tax increases, and Democrats will resist large budget cuts. After a compromise on increased revenue and some spending cuts, we can assume large deficits will continue. The U.S. economy will struggle to hold at 2% GDP growth, which will keep the Fed firmly accommodative.
The current Fed QE3 program has committed to purchase $120 billion mortgaged backed securities by the end of 2012, and an additional $480 billion in 2013, if the program continues. In addition some of the district Federal Reserve Presidents, such as Charles Evans, in Chicago, are in favor converting operation twist, which ends December 2012, into the purchase of $45 billion a month in Treasury bonds with new money, rather than selling short term Treasuries. This would increase the Fed balance sheet another $540 billion in 2013. If combined, these two programs would increase the Fed balance sheet to approximately $4 trillion by the end of 2013.
In 2007, before quantitative easing, the Fed held $908 billion in assets. By the end of 2013 the balance sheet could increase by over 300 per cent, or $3 trillion dollars. Since U.S. banks hold less than 1% reserves for deposits, banking credit could theoretically increase by $300 trillion over time, if Fed Balance sheet was not reined in. Since China pegs the Yuan to the dollar, its central bank would have to print additional currency to off-set an increase in the U.S. monetary base. The European Union central bank would also be required to increase the amount of Euros.
In 2013, many financial experts expect to see substantial coordinated quantitative easing from central banks, as they attempt to stimulate their economies, and fight a worldwide slowdown in economic growth. Food, energy, and other commodity prices can be expected to spike as the major world economies attempt the largest fiat money printing experiment in history. Many experts predict a war in the Middle East or a spike in crude oil prices will eventually cause a break-up in the Euro, and a major banking crash, which will in time, will lead to the next monetary bubble.
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