The general feeling, or « sentiment », is leaning toward a tapering of money printing by the large Western central banks, due in part to the official statements of the Fed indicating it might taper its quantitative easing (QE). For now, it’s just an hypothesis invoked by its Chairman, Ben Bernanke, but it was enough to rattle the markets, notably with the outflow of funds from emerging countries, which is putting much downward pressure on their currencies. In any case, everyone agrees that the american central bank cannot continue injecting $85 Billion a month out of thin air into the economy.
But this sentiment has also created another effect, the rising of long-term rates in the United States and Europe. The U.S. 10-year rate is getting close to 3%, and Germany’s is close to 2%. Nothing catastrophic yet but, if the rates keep rising, the weight of the debt will become really unbearable for the U.S. federal budget. But there is one effect that has not been created by all this quantitative easing : a real economic recovery, even though the government and the Fed are trying to sell us the idea, the « sentiment » of it.
With these legitimate worries, does the Fed have any leeway? It can’t reduce its prime rate, it’s already at zero! What else, then? QE, QE and more QE! It could (of course) be « exceptionally and temporarily » augmented to kick the can down the road again. This is exactly what the Bank of Japan has been doing since the start of this year. It doesn’t create any tangible results, it only creates bubbles and volatility, but it perpetuates the illusion.
In Europe, the ECB doesn’t buy the countries’ debt like in the USA; instead it lends enormous amounts to banks which in turn buy their countries’ debt. This has exactly the same result, but it goes through the banks (which, by the way, weakens them, because their balance sheets are full with sovereign debt...). We have witnessed two LTROs of 500 billion euros each, at the end of 2011 and the start of 2013 (3-year loans at 1%). And we are hearing more and more rumors about another LTRO if interest rates keep rising...
In the United States, we will have to wait to see who the next Fed Chairman will be on January 31, 2014, but it’s hard to imagine the new Chairman playing « bad boy » by tapering QE and thus rattling all the stock markets and the whole financial world. Instead, why not bring out the champagne for everyone, along with a « temporary », of course, speeding of the printing press? We’ll then have to fasten our seat belts... made of gold.
Reproduction, in whole or in part, is authorized as long as it includes a link back to the original source.
Philippe Herlin Finance Researcher / Member of the Goldbroker Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.