The war of words continues as the Fed talks down QE just to see what will happen… but don’t be fooled.

I don’t care what form it is, or how it is spun, another round of quantitative easing is coming.

It must.

The Fed is painted into a corner and there is no other option.

Every time the U.S. economy begins to deal with the hard facts of a deflating credit bubble, there is pain. The Fed doesn’t want pain. The administration doesn’t want pain. Congress does not want pain. So the Fed prints more money.

The next slowdown in the U.S. economy is here. When the statistics that confirm this are reported, the Fed will announce its “bold and righteous plans” to once again save us from ourselves.

Please, someone, save us from the Fed!

The Predictable Quantitative Easing Pattern

In the spring of 2009 the Fed announced a plan to print $1.25 trillion out of thin air and to use the money to buy mortgage backed bonds.


Because no one else wanted the bonds.

Housing was in a tailspin and buying bonds backed by mortgage payments seemed like a bad idea. The Fed, however, did not buy just any bonds. The fed only bought bonds that had a government guarantee – FNMA, FHLMC, GNMA, etc.

Meaning these bonds would eventually be paid off by the U.S. government, assuming the government didn’t change the rules midstream… as it had so many times in the past.

Based on the news that the Fed would buy these bonds, bank shares shot higher and so did equity markets. When the buying program came to an end in the spring of 2010, the markets faltered. So we got QE II.

In August 2010, Bernanke announced his plan to print even more money, this time buying U.S. Treasuries. When the details were released in November, we found out the size of the program would be $600 billion. Markets shot higher.

Then in the summer of 2011, after the program ended, the markets faltered.

Notice a pattern? The Fed did… and so was born Operation Twist.

The latest of the QE programs involved the Fed selling short-dated U.S. Treasuries and using the money to buy long-maturity U.S. Treasuries, thereby forcing down interest rates. Again, the markets moved higher.

This program ends this June.

How We Know the Fed Expects Inflation to Fall

In February, the Fed announced a 2% inflation target. This is interesting because the current interest rate is 3%. Shouldn’t the Fed be tightening credit and raising short term rates? Of course it should!

Unless, that is, they have different expectations… which is obviously the case.

The Fed expects inflation to fall, most likely to the 1%-2% range, by May.

GDP will be a slower 1%-2% as well, falling from the 3%-rate of the 4th quarter of 2011.

With Operation Twist ending, falling inflation and a lower GDP number, the Fed will have all the cover it needs to implement QE3.

This will cheapen the dollars in your pocket one more time… making basics like food and energy more expensive. So much for the standard of living.

Where does all this end?

We don’t know. As a famous economist once said, “If a situation cannot go on forever, it will eventually end.” We agree, and we wish we had the exact timing at our finger tips of when the financial markets, investors and citizens will cry, “Enough!” But we don’t.

So, between now and then, we’ll continue to play both sides, investing for the booms created by natural (demographics) and unnatural (monetary policy) forces, and preparing for the bust that is eventually headed our way.


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Harry Dent
Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.