The Federal Reserve announced this week new measures it will take to stimulate the economy and get the unemployment rate down to 6.5 percent. Chairman Ben Bernanke will replace its Operation Twist stimulus program with $45 billion in monthly purchases of Treasuries. This will also be on top of the $40 billion in monthly mortgage-backed bonds it began to buy in September.
Next year, the Fed is hoping to expand its net balance sheet by $1 trillion from approximately $2.8 trillion. The Fed’s holdings were close to $800 billion prior to the economic collapse in 2007/2008. The new creation of money will be performed every month when it purchases more Treasuries and bonds.
Another part of its announcement is to keep the key short-term interest rate at or near zero percent “as long as the unemployment rate remains above 6.5 percent.” The official unemployment rate hovers just below eight percent.
On Wednesday, Peter Schiff, former 2010 Republican Senate candidate and president of Euro Pacific Capital, reiterated his earlier viewpoints on the Federal Reserve’s monetary actions in a video posted to YouTube.
Schiff, the bestselling author of “Crash Proof” and “How to Grow an Economy,” stated that Bernanke is throwing the United States dollar over the currency cliff with his latest round of actions. He believes that the balance sheet will not end at $4 trillion at the end of 2013 “because this is open-ended” as the Fed essentially warned that it is going to do undergo these steps indefinitely.
He noted that the Fed explained that even if the unemployment figure gets to below 6.5 percent then it still will “not take the punchbowl away” because it depends on how the economy gets to the desired unemployment level. For instance, if the unemployment rate lowers to 6.5 percent by individuals exiting the labor force then Bernanke would still not raise rates.
“The only variable is: how long can Ben Bernanke get away with lying and pretending there is no inflation? How much inflation can he create?” asked Schiff in his video. “By expanding your balance sheet by over $1 trillion a year, that’s massive inflation that is the definition of inflation. He is inflating the money supply. Prices are going to rise in response to that. The question is: how long can he convince the world that prices aren’t rising, despite all the inflation he is creating?”
When a reporter asked Bernanke during a press conference what the track record of the Fed’s forecasting is, the Chairman responded that since the financial collapse it has only been too optimistic and has revised some of its standings.
However, Schiff explained that its forecasting record is horrendous because the central bank noted in the past that there was no housing bubble or stock market bubble.
“The Fed’s long-term forecasting, particularly when it comes to seeing a crisis in advance or a bubble, like the stock market bubble or the real estate bubble, is horrible,” stated Schiff. “So if they couldn’t see the stock market bubble and they couldn’t see the real estate bubble, should we be surprised that they can’t see the bond bubble or what’s going to happen when it bursts or what’s going to happen when the dollar collapses.”
Bernanke was also asked if he is just monetizing the debt, which Schiff says is exactly what the Fed is doing. The Fed Chairman responded that it’s not monetizing the debt because eventually in the future it is going to sell all of the bonds that it has been purchasing.
It is expected that the Federal Reserve’s balance sheet will hit the $6 trillion mark in a few years, which led Schiff to ask: “How can it possibly do it? Who’s going to buy? What are the prices going to be for these mortgage-backed securities and these Treasuries? Can you imagine the enormity of the losses the Fed is going to suffer that the Treasury is going to have to make up?”
Schiff warned that interest rates are going to skyrocket because if inflation is at, for example, eight percent then the interest rates have to be above that number in order to contain inflation. If Bernanke only raises the rates by 25 or 50 basis points, while inflation is much higher than that, then inflation will never be restrained. It will be, as Schiff noted, a moving target that he will never hit.
“Either we’re going to have to see a complete economic meltdown or we’re going to get something worse. We’re going to get hyperinflation because the Fed is afraid to melt the economy down so it melts the dollar down instead,” said Schiff, who believes that Bernanke understands how bad the U.S. situation will get.
What’s the bottom line? Schiff urged everyone to get out of the dollar as quickly as possible. He predicts that as bad as the economy is in Europe, people are even going to flee to the euro once they learn about Bernanke’s various monetary decisions, which will help get money back into Europe and assist in short-term growth.
What are some other options? Buy gold and other precious metals, look at some foreign currencies with more stable fiscal policies and research other stock markets around the world with potential growth, such as the Asian economies.