Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

When Fed Money Printing Runs Wild

Interest-Rates / Quantitative Easing Jun 04, 2014 - 11:00 AM GMT

By: Clif_Droke

Interest-Rates Since the advent of the quantitative easing (QE), the Fed’s unprecedented attempt at reversing the impact of the credit crisis, many long-held beliefs and assumptions have been demolished. One of the most sacred assumptions on the part of investors and economists alike is that central bank money printing always eventually leads to inflation. Yet six years have passed since the Fed first embarked on its historic attempt at reversing the effects of the credit crash and alas, no signs of inflation are on the horizon.


Quantitative easing has increased the stock of money in economies of the U.S., the U.K. and Japan by nearly $4 trillion in recent years. The success of this coordinated monetary policy response to global deflation was an undeniable success; since 2009 the U.S. economy has been in recovery mode while other major economies have had varying degrees of recovery. That’s not to even mention what QE has done for equity markets: several major U.S. indices are at or near all-time highs as of this writing. So what could possibly be wrong with the latest idea being bandied about among several commentators, namely that printing money should be employed more often by central banks in the coming years?

An old Chinese proverb says, “Success breeds failure, and failure breeds success.” Unfortunately, this saying definitely applies to the economic realm. Many economists wrongly assume that since QE has failed to create inflation the problems normally associated with loose money have been permanently solved. Nothing could be further from the truth. As we shall see, the Fed’s timing in implementing QE was fortuitous given the current phase of the long-term cycle of inflation/deflation. Circumstances beyond the Fed’s control have more to do with QE’s failure to create inflation than either policy or infrastructure.

In a recent Bloomberg Businessweek editorial, Michael Metcalfe, an asset strategist at State Street Global Markets, suggests that money printing could be a useful tool for alleviating global poverty. Since inflation didn’t jump in the wake of QE as the alarmists predicted it would, Metcalfe believes the Fed and other central banks should push the envelope by printing even more money in the name of global poverty relief. Metcalfe argues that investors are confident of central bankers’ ability to stop printing if inflation ever does become a problem. He seemingly falls victim to the trap of extrapolating current trends into the distant future, never considering that the last five years could be the exception to the rule.

Metcalfe also maintains that the lack of inflation is partly explained by the ongoing weakness of growth, characterized as it is by spare capacity in many industries, tepid bank lending and low money velocity. “Nevertheless,” he writes, “the experience of quantitative easing has demonstrated clearly that, under the right economic conditions and with a credible inflation-targeting central bank, the creation of money by sovereigns can be an effective policy tool to flight disinflation.”

Metcalfe also suggested that as long as it sees little risk of inflation, the Fed could print money to match the government’s overseas aid payments up to a certain limit. He also proposed “creating money to buy bonds of countries receiving aid that are directly linked to development goals.”

Metcalfe opined that “print aid is technically possible” and wouldn’t necessarily create inflation. “The experience of the financial crisis has shown that the risks from money creation are more manageable than previously believed,” he concluded. “Now might also be the only time in which developed nations can actually afford to provide the level of aid to the world’s poor they’ve always aspired to.”

The theme sounded by Metcalfe in his Businessweek editorial is also being echoed by other commentators. In their book Modernising Money, Andrew Jackson and Ben Dyson argue in favor of governments issuing perpetual interest-free bonds. Under this scheme, central banks would then be required to purchase these bonds in certain amounts. The bonds, the authors claim, won’t add to the national debt since they never mature.

Money printing schemes such as the ones proposed by Metcalfe, Jackson and Dyson are symptomatic of the unusual economic environment of the past five years. An economist wouldn’t be an economist if he didn’t show fidelity to the Cardinal Rule of their trade: linear extrapolation. They see the success of the Fed’s unprecedented QE policy and naturally conclude that money printing can be pursued to infinity with no inflationary consequences. What they fail to consider is that the past five years are likely to prove the exception, not the rule.

More than any other factor, the final deflationary phase of the 60-year cycle can be attributed to the lack of inflation in recent years despite QE. With the long-term cycles creating counter-inflationary undercurrents there was no reason to believe that inflation would ever be a problem during the years 2009 to 2014. With the start of a new 60-year cycle later this fall, however, those currents will reverse. Inflation, not deflation or disinflation, will be the new long-term normal. The danger occurs if policy makers listen to the wild proposals of economists like Metcalfe and continue to inflate the money supply above and beyond the demands of the economy. If they do, then inflation will become a very real problem at some point in the coming years.

The million dollar question is what happens when banks, businesses and consumers finally throw off the caution that has characterized the market since 2008? At some point the velocity of money will reverse its decline as confidence increases and investors realize that the threat of deflation has disappeared. Will the hundreds of billions in sidelined money enter the economy as a slow, gradual trickle? Or will it re-enter the channels of commerce quickly as a mighty onrushing torrent? Since no one can definitively answer this question, the wisest policy would be to resist the temptation to employ money printing schemes as a palliative for solving global poverty or anything else.

Instead of exploring the outer limits of an apparently successful money printing scheme (namely QE), policy makers would do better to consider the potential pitfalls of the coming long-term inflationary cycle. Once the new 60-year cycle kicks off next year and becomes established it wouldn’t be surprising if the proverbial termites come teeming out of the woodwork. The unaccountably large amount of liquidity created by central banks in recent years will likely contribute to inflation at some point, and it might happen sooner than economists think.

Kress Cycles

Cycle analysis is essential to successful long-term financial planning. While stock selection begins with fundamental analysis and technical analysis is crucial for short-term market timing, cycles provide the context for the market’s intermediate- and longer-term trends.

While cycles are important, having the right set of cycles is absolutely critical to an investor’s success. They can make all the difference between a winning year and a losing one. One of the best cycle methods for capturing stock market turning points is the set of weekly and yearly rhythms known as the Kress cycles. This series of weekly cycles has been used with excellent long-term results for over 20 years after having been perfected by the late Samuel J. Kress.

In my latest book “Kress Cycles,” the third and final installment in the series, I explain the weekly cycles which are paramount to understanding Kress cycle methodology. Never before have the weekly cycles been revealed which Mr. Kress himself used to great effect in trading the SPX and OEX. If you have ever wanted to learn the Kress cycles in their entirety, now is your chance. The book is now available for sale at:

http://www.clifdroke.com/books/kresscycles.html

Order today to receive your autographed copy along with a free booklet on the best strategies for momentum trading. Also receive a FREE 1-month trial subscription to the Momentum Strategies Report newsletter.

By Clif Droke

www.clifdroke.com

Clif Droke is the editor of the daily Gold & Silver Stock Report. Published daily since 2002, the report provides forecasts and analysis of the leading gold, silver, uranium and energy stocks from a short-term technical standpoint. He is also the author of numerous books, including 'How to Read Chart Patterns for Greater Profits.' For more information visit www.clifdroke.com

Clif Droke Archive

© 2005-2022 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