On August 26th Ben Bernanke joined central bankers, policy makers, and academics from around the world for the yearly economic symposium at Jackson Hole, Wyoming. The key topic on everyone’s mind was the turmoil in the financial markets as Europe grapples with problems surrounding the PIIGS and the United States deals with high unemployment, congressional gridlock, and stagflation.
The markets are looking for a panacea in the form of additional quantitative easing but the leaders may not be in the mood to offer up the fix they are seeking. In Europe, leaders of both France and Germany spoke of the need for greater and tighter economic integration, insisting on balanced budgets and a strong EU with the mandate to overrule sovereign nations.
In the US the finger pointing continues as Congress seeks a scapegoat for the countries problems. The financial markets see the gridlock as a reason for concern and have sold off stocks accordingly in the hopes that a weak economy and slow economic growth will spur action from either the Congress or the Federal Reserve.
But there are risks to the so-called "Twist" or QE3 solution. The first risk is the failure of the QE2 which did not spur employment growth and borrowing from businesses. QE3 may be no more than literally pushing on a string.
The second risk coming from QE3 is the possibility of a split Fed. At the last meeting 3 Federal Reserve Presidents dissented at keeping the Federal Funds rate between 0 and 25 basis points through mid-2013.
“Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy.”
“Uncertainty is corrosive; it is hurting job creation and capital expansion when we need it most. As Margaret Thatcher would say: “Don’t dawdle. And don’t go wobbly on us, Congress.” Monetary policy cannot substitute for what you must get on with doing. Get on with your job.”
Philadelphia Fed President Plosser remarked in an interview, “What we did isn’t going to work,” he said. “Our problems are not problems easily addressed by monetary policy,” he said, adding that the Fed is “risking its credibility because it’s doing things that don’t work.”
The final dissenting vote came from Minneapolis Federal Reserve President Kocherlakota who commented on rising personal consumption expenditures and high unemployment.
St. Louis Federal Reserve President Bullard commented that “The inflation picture is different this year than it was last year and the risk of deflation is much more remote than it was last year.”
With four Federal Reserve Presidents against current policy a move towards new fixed income purchases by the Federal Reserve risks splitting the FOMC in a way similar to the split in Congress between both parties.
The third and final risk coming from QE3 harkens back to Dallas Fed President Fisher’s first comment regarding fiscal policy. If Congress and the President cannot decide on a 2012 budget, enact reasonable spending cuts, and enact polices to create a more business friendly environment any amount of new quantitative easing will be useless.
Should QE3 happen in the near future, all bets are off for Gold and Silver. The downgrade of US debt shifted us from phase 2 of the Gold and Silver bull market to phase 3 where the general public will start a mad stampede in order to protect their assets.
Even as we speak people are lining up at jewelry stores to sell their gold remaining oblivious to where the price of gold is headed over the next five years.
During this selloff Gold (GLD, DGP) and Silver (SLV, AGQ) acted much better than 2008 when both sold off with the market yet ended up for the year. Now there is a global stampede into the precious metals with gold and silver providing safety and security in this time of economic uncertainty.
As phase 3 begins to move forward we can look to increasing interest by the public in gold and silver. This will build to a fever pitch as the gold price moves higher and stock prices of mining companies join the rally on an explosion in profits.
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