Expanding rumors last month of a possible "tightening"
Nevertheless, these fears are preposterous on two counts. First, the Fed just spent the previous year along with a half extending the maturities of its whole portfolio. That was the whole objective of Operation Twist. The average maturity of the whole portfolio is now over ten years. That means any wind-down utilizing the technique Bernanke outlined would play out over the course of decades - not months or years. Luckily for hard asset investors, it's unlikely to play out at all.
The second purpose these fears are unfounded is the fact that there's no exit technique. Listening to Bernanke's testimony, it was clear that right here was a man merely speculating about when an exit may be undertaken - or maybe if it would ever be taken. Senator Corker from Tennessee accused Bernanke throughout the hearing of being "the greatest dove since World War II." "I believe it is some thing you are rather proud of," the Senator continued. The Chairman's response to the charge of recklessly endangering the nation's currency? "In some respects, I am."
The Fed Chairman has been speaking about tightening for some time. In 2010, he stated, "As the expansion matures, the Federal Reserve will need to start to tighten monetary circumstances to stop the development of inflationary pressures."
Back then, exactly the same mainstream analysts had been predicting recovery along with a reversal of quantitative easing (QE). Rather, we have subsequently noticed QE2, Operation Twist, and now QE3 to eternity. Rare Coins, Silver Coins, Gold Coins, Learn more >> http://www.silver-
There's no exit technique because the outcomes of the Fed withdrawing its artificial support could be disastrous for the US Treasury as well as in the short-term, the US economy.
The Fed is anticipated to purchase almost 90% of new Treasury bonds in 2013, based on reports. This can be a tremendous subsidy that has kept 10-year Treasury yields beneath 1.95% on average this year so far. Last year, with 10-year yields averaging 1.8%, the Treasury spent $360 billion on interest payments alone. That represented almost 10% of all expenditures.
Let's assume a Fed tightening causes these rates to triple - not unreasonable to get a government facing over 100% debt-to-GDP. If these rates triple by 2015, and another $2 trillion or so is added to the debt, then interest would make up over 30% of annual federal expenditures. Just interest. Then, you will find principal repayments, Medicare/Medicaid, Social Security, the Armed Forces, and all of the other entitlements for which the Treasury is accountable. Is Washington going to default on our creditors, our seniors, or our men and ladies in uniform?
I think these assumptions are nonetheless rosy in comparison to what may really occur when the Fed were to withdraw support. The US sovereign debt marketplace is really a house of cards in which the Fed, foreign creditors, and domestic investors each play a part. If the Fed were to signal that creditors may face haircuts, then the reaction might be swift to the downside. If rates went above 10%, as they have in Greece, then over half of the federal spending budget could be committed to interest payments alone.
But that is not all. Greater interest rates would trigger the shaky housing marketplace to take another nosedive. Few Americans are in a position to purchase a $300K home at 10+% interest. Rather, prices would have to decline to levels inexpensive for money purchasers and these prepared and in a position to take out high-interest mortgages. That may mean another 50% decline or more, in real terms.
With housing taking a second bath, we are able to anticipate the banks to not be far behind. That sector remains bloated and dependent on numerous subsidies in the Fed. With loan rates greater than their clients can afford, banks would fail at a price greater than 2007-8. This would trigger another round of bailouts in the Treasury; but with out Fed help, exactly where will the funds come from?
If there is not a bailout, the significant money-center banks would collapse, crippling Wall Street's reputation because the international monetary center. The US dollar's reserve status may then be abandoned as soon as and for all.
Rapidly, one can see how the Fed's money printing will be the mask holding this charade with each other.
To determine in real time what occurs when the mask is pulled off, look to the Mediterranean. Greece has noticed the Golden Dawn neo-nazi party win 7% of seats in the last two elections. Italy, meanwhile, just saw a comedian with no political background grab 25% of its parliament in a satirical candidacy. Street protests, unemployment, as well as other indicators of instability are rampant. The protestors aren't studying a difficult lesson concerning the consequences of profligate spending; rather, they are merely angry that the cash has stopped flowing.
No one in Washington - not least Ben Bernanke - has any intention of setting off a comparable episode in the US. However, that is precisely what a tightening of monetary policy would do. So, a minimum of as long because the CPI numbers may be fudged to create inflation seem "contained,"
Returning to the newest Fed minutes that have hard asset investors so upset, it's telling that while there was some discussion of the dangers of money printing, only one of twelve governors really voted against continuing present policies. With no concrete actions being taken and an overwhelming majority nonetheless in favor of present policies, it appears gold bears are making much ado about absolutely nothing.
As investors understand this, they'll once again put their pedals to the precious metals. It is a good time to buy gold and buy silver and hang on for the ride. How high will silver go? Learn more >> http://silver-