Rathbun: ‘To infinity and beyond’Written by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
Last week, I couldn’t help but think of the movie “Toy Story.” While I have never actually seen the movie, I do remember the advertisements with a character named Buzz Lightyear, voiced by Tim Allen, and his catchphrase, “To infinity and beyond.” Federal Reserve Chairman Ben Bernanke essentially used that mentality last week when he announced additional money printing until the economy recovers “and beyond.”
At the very least, this means the balance sheet of the Fed will go from $2.3 trillion to more than $4 trillion in the next year or so. Bank of America came out with calculations that speculated the Fed’s balance sheet would go as high as $5 trillion by the end of 2014.
If this is the case, and I believe the bank is probably correct, by the end of 2014 the Fed will own about 33 percent of the mortgage market and account for just below 30 percent of all goods and services used to calculate the GDP. Additionally, by that time, it will own 65 percent of the entire bond market with maturities older than 5 years.
The Fed has implied it will keep interest rates at or near zero until 2015. It has also implied inflation is not a problem and that these policies and actions will have no negative effect on the dollar. This from the same people who said TARP would save us, then QE1, then QE2, then Operation Twist, then Operation Twist 2 and now QE3, with a continuation of Operation Twist.
What’s next? The Fed will soon run out of debt to purchase and then it will have to come up with another strategy. What could that possibly be? I said a while back on the radio, the Fed would reach a point where it starts to purchase equities. Unfortunately, by this time, hyperinflation is likely.
The immediate question then becomes what happens over the next few years as the Fed carries out its plan to print and print and print? Bank of America’s report speculates gold will reach $3,350 an ounce and oil will reach $190 a barrel. I would agree with this assessment but with the caveat that it is probably on the low side.
Now our favorite Keynesian economist Paul Krugman likes what Bernanke has started, but was disappointed that the response wasn’t “stronger.” We have reached a point of absurdity in economics and with the general populace more concerned with “American Idol” judges than with the state of the country, I don’t see the level of understanding increasing anytime soon.
I often use the path Zimbabwe has gone down with its currency to illustrate the path we are on. In 1980, not that long ago for some of us, the Zimbabwe dollar was on parity with the American dollar. Today you can purchase a $100 trillion bill from Zimbabwe for less than $1 on eBay. The currency lost so much value Zimbabwe quit using it several years ago and replaced it with American dollars for most day-to-day commerce.
We could easily go down the same path. It will be different, of course, since we are a world currency and dollars are used throughout the world for oil and other commodities, but we could easily experience similar problems.
The Fed’s actions are counterintuitive to what is needed. Higher deficits and larger national debt will sink us, not save us. We have reached a critical pivot point in our economic history and future generations will look back at our actions and say, “How could they be so obtuse to reality? Why did they think that borrowing more money would reduce the debt? Why did the Fed think that it could stop inflation cold whenever it wanted? Why did it think borrowing money would increase employment?”
It won’t be long before the number of dollars needed to buy a loaf of bread will reach “infinity and beyond.”
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, Ltd. He can be heard every day at 4:06 p.m. on After the Bell with Brian Wilson and the Afternoon Drive, and every Wednesday and Thursday at 6 p.m. throughout Northern Ohio on Eye on Your Money. He can be reached at (419) 842-0334 or email him at garyrathbun@private wealthconsultants.com.
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