Riding Into The Sunset or a Brick Wall?
By Peter Schiff
Tuesday, 9 October 2012
A month ago, I presented the case for why Fed Chairman Bernanke would have strong motivation to launch another round of quantitative easing (QE) before the election. In short, it would save him his job. Now, I didn’t predict with certainty that he would do so – only the few men at the FOMC knew that for sure – but it seemed likely. Shortly thereafter, Bernanke not only announced more stimulus, but promised to keep it flowing to the tune of an additional $40 billion a month until conditions improve. As I had written, this is essentially the election platform of the Obama-Bernanke ticket: we will keep the party going indefinitely.
Unfortunately, though these are two powerful men, they are not above the law of economics. While critics have dubbed this program “QEternity” or “QE-Infinity”, it will end much before that. We are witnessing a massive bubble in US government debt, and we’ve reached the point where no one in charge believes it will ever end – an excellent contra-indicator.
Rather than going on for eternity, this third round of QE is only hastening the day when there is a flight of confidence from the dollar and US Treasuries. This will cause a sharp rise in market interest rates and surging consumer prices across America. If you think $4 a gallon gas is bad, wait till you see it going up by 25¢ or more per week.
At this point, the Fed Chairman will have a choice to make: keep printing, which will push the dollar into uncontrollable hyperinflation, or begin tightening, which will bankrupt the US government and banking system.
I have long written about this Sophie’s choice confronting the Fed, but so far the printing option has been too easy. With the world only slowly abandoning the dollar as the reserve currency and the euro crisis offering a distraction, the Fed has been able to more than double the money supply without US consumers seeing out-of-control price hikes at the store. Not that there hasn’t been inflation – look at housing, gas, or the stock market – but it hasn’t reached crisis proportions. When prices start rising fast enough for the average person to figure out he’s being screwed, then there will be riots in the streets.
The good news for precious metals investors is that either scenario is bullish for gold and silver.