Dollar Drenching

by Nigel Bolton-Shaw on October 25, 2012

Forbes tells us that the Federal Open Market Committee will expand QE3 In December. The FOMC oversees Fed buying and selling of United States Treasury securities among other duties.

On Wed, the FOMC decided on a wait-and-see approach, which means December will see a more definitive decision, according to Forbes. QE3 could be bumped to $85 billion a month as Operation Twist subsides. Both programs are already in effect.

Precious metals, commodities, real estate and certain stocks (both long and short) are viable options for those who wish to capitalize on central banking induced volatility.

Forbes also tells us the European Central Bank’s Mario Draghi is pushing hard in Germany for his bond-buying program – so easing is coming on two fronts. Here’s some more from the article:

Bernanke and the FOMC propped up risk assets across the board. In Europe, rattled markets settled and yields on peripheral debt, particularly in Spain and Italy, receded, giving politicians some much needed breathing space. On this side of the Atlantic, equities rallied effervescently, along with gold.

The Fed is currently buying $85 billion in longer-term securities a month, $45 billion of those financed by the Twist with the remaining being poured into mortgage-backed securities via QE. Goldman’s Hatzius believes Bernanke deliver will deliver the good news in December: the Fed will increase its QE program in order to keep the rate of monetary easing steady, the economist noted.

Goldman Sachs’ chief economist Jan Hatzius believes the committee is committed to a strong pace of asset purchases. “Our baseline expectation is a continuation of the current pace of asset purchases of $85bn per month on an open-ended basis, which would imply that the current $45bn per month in twist-financed Treasury purchases is replaced by $45bn per month in QE-financed Treasury purchases.”

The big news is that those at the Fed are uncomfortable making calendar-based statements and want to move toward “outcome-based guidance.”

This involves something called the “Evans Rule,” which would tie “interest-rate movements to the Fed’s dual mandate.” Under this concept, the FOMC would refuse to raise rates until unemployment falls below a certain threshold. This is huge news because it strengthens the Fed’s self-determined role as a “scientific” monetary administrator.

In theory, targeting certain goals and then using monetary policy makes a lot of sense. But in practice, it is difficult to see how it will work. That’s because indicators are rear-view mirrors. The money being inserted or removed by the Fed continues to have an impact long after the goal has been reached. Over-shooting is a predictable result.

What can be said with certainty is that the kind of aggressive money printing with which the Fed is involved is going to continually create a larger asset bubble and more over-all volatility.

This is what happened in the 1970s in a similar situation but Fed actions in the 1970s were tame compared to what’s going on now. Fed officials want to portray themselves as scientific administrators of monetary policy but money itself – when produced in such amounts – is anything but scientific.

Chicago traders like to say the “trend is you friend.” The Fed is producing a mighty trend indeed by drenching the world in dollars.


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