Note: The following article was published in 2010. Please see the accompanying video below. We chose to re-publish in light of the fact that no matter the complexity of the tinkering, the more things change, the more they stay the same. JL
While we were led to believe that the Fed would begin tightening upon recovery, new fears of a double dip have sparked the Keynesian clan into moving in the opposite direction. Soon enough, we believe, a new quantitative easing program will be unveiled.
Bernanke is Afraid to Raise Rates
Perhaps the most perma-bear of them all is Ben Bernanke, who after nine months straight of economic gains has yet to let loose on historically low rates. Mind you, the recovery is fragile, however in no time in history has virtually free money ever solved any problems. The most recent real estate bubble was a product of low rates, as was the bubble prior to the Great Depression, and so will be the next bubble.
Knowing this, Bernanke is afraid more of the chance the US will double-dip or inflation will take hold than he is of absolutely destroying the dollar to the point where it isn’t even worth the paper on which it is printed. After nine months of growth, one would expect at least a tenth of a point increase from rates of 0-.25%.
Another Dip Lurks
While we cannot be certain a double-dip recession is in store, the Economic Cycle Research Institute, which publishes the ECRI leading indicator, nearly is. The reading collapsed to a 45 week low of -5.7, the quickest slide since the Great Depression. A reading that low is generally a very good indicator that you should expect a recession within the next three months. In the Fed’s own releases, they have replaced the word “strengthening” with “proceeding” to describe the current state of the US economy.
Prominent Keynesians Call for Stimulus and QE
Perhaps the loudest of all the Keynesians, Paul Krugman has authored more and more Op-Eds to the largest papers calling for either an increase in government spending, quantitative easing, or both. In each, he blasts conservatives for railing against government spending to fuel the economy and notes that the first stimulus package was not enough to keep the US from falling into depression.
His voice sheds an important light on the status of the Keynesian think-tank, as Krugman generally mirrors the opinions and outlook of Bernanke. Krugman, of course, also has plenty of political clout, having won a Noble Peace Prize in Economics.
2011 Debt Issues
One of the biggest reasons the Federal Reserve will have to use quantitative easing is that interest rates will rise sky-high with inaction. Just last year, the Federal Reserve displaced nearly 90% of the entirety of the fixed-income market with quantitative easing. Next year, there will be no support, and ten times more debt will reach auction, straining the credit markets. These same credit markets finance government debt as well, and with limited funds and nearly unlimited debt loads, we have to wonder how high treasury rates will rise without support.
The Fed will again use quantitative easing as a way to buy their way out of a depression. The expense, however, will be great—a weaker dollar and eventually higher interest rates. Buy precious metals ahead of the program because afterward they won’t look very cheap.