Unlimited quantitative easing…
That is a sentence I never dreamed we’d see. Yet it is exactly what the Fed has done.
If you’re unfamiliar with QE then let me break it down for you.
See, typically a central bank will use interest rates to try and lift inflation. In recent years though, we’ve seen interest rates hover at abnormally low levels. Giving central banks, like the Fed, little room to move.
QE though, allows the Fed to stimulate an economy in a different way. Rather than trying to increase borrowing, the Fed simply buys assets. It’s a roundabout method that, at its simplest, leads to more money being printed.
Basically, QE lets the Fed make money out of thin air.
This isn’t some new idea though. The Fed has been dabbling with this wacky methodology ever since December 2008. The key distinction though, was that they always had limits. That is until now…
The world’s most powerful bank has free reign…
As of Wednesday (Tuesday in the US), the world’s most powerful and influential central bank now has free reign.
They can print as much money as they see fit. Flooding the US markets with cash and loading up the Fed with debt.
Seriously, I can’t stress the magnitude of this decision. Nor can I emphasise just how unpredictable the results of this decision will be.
Having the Fed intervene in markets is a tricky affair.
If they intervene too little we end up with a situation like the Great Depression. Intervene too much and we could wind up with hyperinflation.
Suffice to say, neither of these outcomes are desirable.
If by some miracle they manage to strike the perfect balance though, they might be able to avoid both.
It’s a big ‘if’ though. And even if they manage it, we still don’t know what the long-term ripple effects might be…
In my view, intervention should never be the answer.
There is even an argument to be made that we’re in this current market mess because of previous central bank meddling. That’s a discussion for another day though.
Instead, what I want to make clear is just how reckless this QE move is.
Make no mistake, this decision will have long-term ramifications. Many of which we suspect will not be for the good for ‘free markets’.
We are now all a part of the ultimate monetary experiment. One that could upend economics as we know it.
As Friedrich Hayek once said:
‘It is one of the saddest spectacles of our time to see a great democratic movement support a policy which must lead to the destruction of democracy and which meanwhile can benefit only a minority of the masses who support it.’
Indeed, Hayek must be rolling in his grave right now. His life’s work was spent warning the world about the exact situation we now find ourselves in.
A trap of high money supply, low interest rates, and looming inflation. Which is exactly what might be next for the US.
You see, once this virus is over, things don’t go back to the way they were. The Fed’s intervention doesn’t stop. 2008 already proved that.
There were plenty of chances for the US to wean itself off of the last round of QE. That didn’t happen though.
Now they’re set to make trillions of dollars out of thin air. Pumping money into the system to prop it up.
For some this will be seen as the final nail in the coffin. The last mistake central banks will make before the system collapses. And by that I mean monetary policy as we know it.
Jim Rickards has argued this case for years now. Foreseeing the coming collapse and hubris of the Fed. You can read more of his thoughts, including his advice on how to protect your wealth, right here.
Personally, I think Rickards makes some good points. However, I don’t think this virus is going to kill central banks just yet.
No, I think this will be their last huzzah.
A bull market like no other
See I expect QE will work…for a time.
This decision by the Fed tells me they will go to any lengths to save markets. Even if it means just handing out free money.
Because of this, the ‘bust’ that we need is not the bust that we’re getting. Again, as Hayek understood:
‘The way to avoid the busts, he argued, is to avoid the booms that cause them.’
Clearly the Fed doesn’t agree.
This unlimited QE, I expect, will lead to an even bigger bull market than the last. They’re just going to pump things even higher than we’ve seen. All but removing credit risk as we know it.
That’s why this current bear market, whilst savage, is going to be a huge opportunity. The Fed is pulling out all the stops to keep the party going.
Because of this I think we should all be ready.
Not for total collapse (not yet anyway), but for the final gambit of crony capitalism. After all, that’s what QE is.
The good news, as I said, is that this will likely result in a bull market like no other. Providing returns that could easily surpass those of the past decade or so. Especially in US markets.
The bad news is that it will likely lead to destruction of the system Rickards describes. Unless the Fed can pull another rabbit out of their hat, this truly is their last resort.
So, when the next bust happens, they’ll be powerless. That is a matter for another day though.
Right now, all that matters is this bust and the response of central bankers.
They’ve shown their hand and they’ve chosen greed. It very well could ruin economics as we know it. But, it’s going to be a hell of a ride getting there.
Best prepare yourself, because things are about to get bumpy…one way or another.
Editor, Money Morning