Investment Contrarians

What a Great Strategy: Need Money? Print More Money

By for Investment Contrarians |

Print More MoneyFederal Reserve Chairman Ben Bernanke has spoken, and to no one’s surprise, the printing of money in America will continue and intensify under the soon-to-be newly launched “Quantitative Easing 4” program, or “QE4.” So now we have had several Federal Reserve programs to keep the flow of money going, and now it looks like there will be more money printing.

Under this aggressive money printing strategy, the Federal Reserve will pursue a more aggressive stimulus strategy in September that will involve the additional monthly buying of $45.0 billion in longer-term treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds under QE3. (Source: Press release, Federal Reserve, December 12, 2012.) The concern is that the additional buying of bonds will add another trillion dollars to the Federal Reserve’s balance sheet in 2013, driving the amount up to $4.0 trillion and keeping the money-printing machine going.

While the aggressive move by the Federal Reserve is needed to make sure the U.S. economic recovery doesn’t falter, many are concerned that the easy money will drive inflation higher. Of course, this has yet to happen, as consumers appear more worried about paying down debt levels than spending. The Federal Reserve suggests it would keep interest rates near zero as long as the unemployment rate hovers above 6.5% and inflation remains manageable.

The market view on the Federal Reserve appears to be unfavorable, based on the initial reaction following the announcement of QE4. Based on the Federal Reserve’s assessment, there’s concern that the U.S. jobs picture and economy may be worse than we expect. “Although the unemployment rate has declined somewhat since the summer, it remains elevated…growth in business fixed investment has slowed,” said the Fed in its press release.

In my view, there’s still a sense that QE4 will not be the savior to the stalling gross domestic product (GDP) growth in America; it will only be a gamble. The reality is that the flow of easy money that will result will largely reward the top one to five percent of income earners and in turn benefit the high-end merchants in the retail sector, which is something I have been saying for a while.

“The richest consumers have a higher percentage of discretionary spending, and dominate not only such categories as hotel stays and financial services, but also hospital and outpatient services, as well as newspapers and magazines.” (Source: “A.T. Kearney Study of Global Wealth and Spending Projects $12 Trillion in New Consumer Spending over the Next Decade,” May 20, 2012.)

Let’s not beat around the bush. QE4 will add to the balance sheet risk for the Federal Reserve and extend the financial issues that have plagued America.

The availability of cheaper money will help people who carry significant debt to lower financing costs for another few years. And the low interest rates mean cheaper cash will be available for the rich to make more money and finance spending whether that’s investments, housing, or other high-cost ventures. This means that the rich, with their larger pool of capital, can continue to increase their net wealth faster than the average American, which has been a major problem.

So while QE4 will help in the near term, the problem is: when will the ink in the printing machine dry up so the country can focus on working to pay down the national debt.

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  • greggwon

    Yes, but if we were increasing taxes on the rich, that money would come back around to fund US govt sponsored projects which would then result in money in the pockets of the blue collar workers, who are the ones that drive the economy from the bottom.

    We really need something to result in either tax reimbursement to 90% of the residents, on the order of about $8k to $10k so that debt is paid off, or it's going to be a long hard road. The credit rush that the FED was not paying attention to, 10 years ago, expanded the economy all of the world to be much larger than there was money/cash to support. The upswing in China sucked perhaps 40% or more of the cash out of the world economy.

    Thus, there is a lot of "inflation" that's actually needed, but we also need to understand once the debt is paid off, an awful lot of cash is going to be running around.

  • OLDMAN123