Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Ending Syria’s Nightmare will Take Pressure From Below - 29th Mar 17
Charts That Reveal US Real Employment Status and It’s Not Good - 29th Mar 17
SNP Controlled Scottish Parliament Demands Right for Scotland to Commit Suicide - Indyref2 - 29th Mar 17
USD Gold Myriad of Signs - 28th Mar 17
Ominous Social Trends That Will Shape Our Future - 28th Mar 17
Foundation And Empire: Is Donald Trump The Mule? - 28th Mar 17
Top Ten US Dollar Risks - 27th Mar 17
The Popularity of Gambling and Investing Amongst Students - 27th Mar 17
Is Political Betting on the Rise? - 27th Mar 17
US Stock Market Consolidation Time - 27th Mar 17
Russia Crisis - Maps That Signal Growing Instability and Unrest - 27th Mar 17
Goldman Sachs Backing A Copper Boom In 2017 - 27th Mar 17
Foundation – Fall Of The American Galactic Empire - 27th Mar 17
Stock Market More Correction Ahead - 27th Mar 17
US Dollar Inflection Point - 27th Mar 17
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

QE-3 Hyperventilating Hyperbole on Hyperinflation

Stock-Markets / Quantitative Easing Sep 21, 2012 - 08:07 AM GMT

By: Ned_W_Schmidt

Stock-Markets

Best Financial Markets Analysis ArticleWow! The hyperventilating hyperbole on hyperinflation to be brought about by QE-3 was near overwhelming. From some of what we read, QE-3 is to cure all the economic woes of the U.S., cause hyperinflation, crash the U.S. dollar, prevent male patten baldness, push $Gold to $2,400, and cause the death of our favorite pet. Oh, and the perennial favorite fantasy trotted out on a regular basis is Silver going back to $50. Could QE-3 really be all those things, or is it really Damp Squib One?


Federal Reserve Bank Credit Chart

In order to appease the Street, FOMC announced the purchase of $40 billion of mortgage backed securities each month. To help understand the meaning this policy let us consider the chart above. The blue line, using the left axis, is Federal Reserve Credit, or the size of the Federal Reserve's assets. We have extended it out a year at a rate of $40 billion per month. Before going on let us note that the rationale for this policy is totally frivolous, and it was adopted purely to appease the paper asset pushers on the Street.

First observation is that adding $480 billion, while admittedly too much, does not compare to QE-2, early part of graph. QE-2 added nearly twice that much in less than six months. Relative to QE-1 and QE-2, QE-3 is not much to talk about. Second, the red line, using right axis, is the year-to-year change in Federal Reserve credit projected out for the next year.

The absolute size of Federal Reserve Credit, blue line, influences the size of the money supply. Red line is a major determinant of money supply growth and the inflation rate. A year from now that growth rate might be as high as 15-20%. While that rate of growth is too high, it falls far short of that necessary to create hyperinflation. Given the structural problems in the U.S. economy being created by the Obama regime, the level of economic slack in the U.S. economy, and the unwillingness of bankers to make loans that create money, QE-3 is unlikely to live up to most expectations.

Two other portions of the FOMC announcement have also received more comments than they are worth. This policy is to be open ended and more could be added to these purchases. What is new in that? That has been the Federal Reserve's policy for decades.

In anticipation of QE-3, or as we prefer DS-1, the teenage traders on the Street pushed $Gold up by more than $200 and sent the U.S. stock market to an unjustified level. What should investors do given that set of market action and the likely ineffectiveness of QE-3?

Gold has firmly established itself as a portfolio asset. Investors are not likely to abandon it. $Gold's price does have short-term risk as most of the action has been in the derivative's market. Investors should by now be accustomed to volatility in the price of $Gold, and must simply learn to live with it. Further, Gold is the only insurance available to protect one from the Obama fiscal cliff set to cause the U.S. economy to fall into recession in January. Obama fiscal cliff is a greater worry than QE-3.

US$ / Chinese Yuan Chart

As Silver does not have the positive long-term outlook as is the case with Gold, investors should be looking at alternatives. An excellent one would be the Chinese Renminbi, shown in the above chart. Note it is approaching a new high. Investors owning Gold should be adding Renminbi to their portfolio. Those holding Silver, hoping to recover, would be betters served by switching their investment in Silver into the Renminbi.

An investment in Renminbi can be done with either bank deposit accounts, the preferred alternative, or ETFs. Latter uses non deliverable forwards, which might make them undesirable for many. Do not use exchange traded notes, ETNs.

Chinese Renminbi, along with Gold, is preferable to holding either U.S. dollars or Euros. Likely appreciation over time versus those two currencies is largely due to growing importance of the Renminbi as a currency in Asia, and the positive long-term prospects for the Chinese economy. Think of it as switching from the British pound to the U.S. dollar in 1913. While the negative outlook for the dollar does help the case for the Renminbi, the positive influence from China's growing economic importance is more important.

By Ned W Schmidt CFA, CEBS

Copyright © 2011 Ned W. Schmidt - All Rights Reserved

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report , monthly, and Trading Thoughts , weekly. To receive copies of recent reports, go to www.valueviewgoldreport.com

Ned W Schmidt Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife