Last week I couldn’t help but think of the old 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 catch phrase “to infinity and beyond.” The Federal Reserve chairman essentially used that mentality last week when he announced additional money printing until the economy recovers “and beyond.”
At the very least, this means that 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 that 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 that the bank is probably correct, then by the end of 2014, the Fed will own about 33 percent of the entire 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 five years.
The Fed has implied that it will keep interest rates at or near zero until 2015. It has also implied that inflation is not a problem and that these policies and actions will have no negative effect on the dollar. This from the same people that said TARP would save us, then QE1 would save us, then QE2 would save us, then operation twist, then operation twist 2 and now QE3 with an additional 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? Well, I said a while back on one of the radio shows that I do, the Fed would reach a point where it starts to purchase equities. Unfortunately, by this time, hyperinflation is likely. (I will expand more on this scenario in a future column.)
The question for immediate consumption then becomes what happens over the next few years as the Fed carries out its plan to print and print and print? The Bank of America’s report speculates that 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 this is probably on the low side.
Now our favorite Keynesian economist Paul Krugman likes what Bernacke 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 understanding level increasing anytime soon.
I often use the path that Zimbabwe has gone down with its currency to illustrate the path that 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 dollar bill from Zimbabwe for less than $1 on E-Bay. The currency lost so much value that Zimbabwe quit using its currency 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 very 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?”
Why indeed?
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.
