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Turk:  The Federal Reserve’s next FOMC meeting is being held this week, Eric, and it promises to be an important one.  The question everyone is asking is, what will happen to the Fed’s so-called quantitative easing scheme, by which it turns debt into more dollar currency?....

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“There are of course only two alternatives:  Either the Fed will finally announce some tapering, meaning it will reduce - but not end - the size of its purchases.  Or, alternatively, Ben Bernanke and his colleagues will kick the can down the road and let the new incoming Fed chairperson, Janet Yellen, decide next year whether to slow down the printing presses. 

Those printing presses are running full-time.  When Mr. Bernanke became chairman back in 2006, the Fed’s total assets were $850 billion.  When the Fed releases its balance sheet data later this week, its total assets will reach a new record and pass yet another trillion-dollar milestone.  For the first time ever the Fed will report that its assets have now ballooned to over $4 trillion.  To put this number into perspective, the Fed has pumped out trillions of dollars, yet the U.S. economic activity remains mired in the Great Recession.

Obviously the Fed’s unprecedented rate of money printing is not helping, and in reality is actually hurting.  The Fed’s zero-interest rate policy is destroying any incentive to save, while at the same time eroding the purchasing power of the dollar through inflation.  The Fed is killing America’s middle-class, which is where the bulk of savings and economic activity takes place.  So it is no wonder, Eric, that the Great Recession is dragging on and on.

In addition to what the Fed is doing to the American people, the Fed is killing its own financial condition.  We need to keep in mind two important points:  First, the Fed only has $55 billion of equity, so it is leveraged at 72-to-1.  Second, about 98% of its assets are debt instruments, none of which are short-term.  All of those were sold years ago and replaced by long-term notes and bonds, the prices of which have declined by about 15% so far this year.

Unfortunately, the Fed does not release detailed information about the debt instruments it owns, and just reports those assets at face value, rather than market value.  So we do not exactly know the impact that rising interest rates have had on the paper the Fed owns.  But applying some simple math here, if the market value of those assets has declined by just 1.4%, the Fed’s net worth will have been wiped out.  Given its high leverage and this year’s jump in interest rates, I therefore think it is reasonable to conclude that the Fed is already insolvent, meaning that its liabilities are greater than its assets.

The Fed has shot itself in the foot, which is the typical outcome of central planning.  Markets are too complex to be managed, and interventions always have unintended consequences.  The Fed probably believed that it could keep interest rates from rising, but seems to have forgotten the basic principle of central planning - in the end the markets are always bigger than any government or group of governments acting in concert, which brings me back to this week’s FOMC meeting.

The markets are anticipating that the Fed will announce a tapering of quantitative easing.  The stock market has been soaring because of easy money, not strong economic activity and prospects.  But it sold off last week in the expectation that the Fed will slow the flow of easy money.  The precious metals also dropped back after taking out important resistance points above $1250 on gold and $20 on silver earlier in the week.  And the yield on the 10-year T-Note has climbed back up to 2.88%, the highest yield in three months. 

But I think there is another point that needs to be discussed, Eric.  If the dollar and the US economy are to start heading in the right direction, the Fed needs to taper, and the market is starting to recognize this point.  These recent market trends I mentioned are telling us that the Fed should cut back on its asset purchases.  QE is not helping the economy, and is doing more harm than good.

Maybe the central planners think they are doing the right thing, just like medieval doctors in the Dark Ages thought a person’s health would improve by attaching leeches to suck out the person’s bad blood.  But the Fed is following crazy policies that defy not only reality, but logic and monetary history.  A printing press and government intervention are never the answers to economic problems.  The Fed needs to be thinking about the economy instead of saving the big banks and funding the U.S. government’s ongoing deficits.  They are the sole beneficiaries of QE.

So the question becomes, what will the FOMC announce this week?  I think the Fed has to taper.  Look at some more of the evidence the market is providing.  The euro has been rising, and is at the highest level against the dollar in two years.  The British pound is also at multi-year highs.  The Fed said tapering was data dependent, and with unemployment at 7%, that is close enough to their target - even if those jobs numbers are fictitious. 

I therefore believe that the Fed will announce some minor tapering this week, but here’s the important point:  Any tapering announcement will not be seen by the market as being enough to put the dollar and the U.S. economy back on the right course.  The market is giving the Fed another opportunity to do the right thing, but the Fed is wedded to its erroneous economic theories and its printing press.

So if precious metal prices dip this week after the Fed announcement, the buyers of physical metal will be doing what they have been doing for months now - standing there with open arms to gobble up whatever metal is offered to them.  This buying will continue to build the massive bottom in gold and silver which has been constructed this year, and, importantly, lead gold to finally reach prices above $2000 next year.”

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