While quantitative easing (the creation of money out of thin air) may have been needed back when the U.S. economy was on the verge of collapse, at this point, more of it simply equates to asking for more trouble ahead.
As regular readers of Profit Confidential know, I have been very critical about quantitative easing. If the Federal Reserve continues to print more money as it buys $85.0 billion worth of bonds each month, inflation in upcoming years will be a bigger problem.
We have already established that the Consumer Price Index (CPI) reported by the Bureau of Labor Statistics (BLS) doesn’t show the entire picture of inflation. In November of 2012, the BLS reported that the CPI decreased by 0.3%. For the first 11 months of 2012, the inflation rate was 1.6%. (Source: Bureau of Labor Statistics, last accessed January 10, 2013.) But the reality is that the way CPI is calculated is obsolete. We all know inflation is running much higher than 1.6%.
Sadly, as inflation continues to take a toll on the pockets of Americans, the Federal Reserve plans to continue quantitative easing until the unemployment rate in the U.S. economy reaches 6.5%.
My question: how long will it take to reach the Fed’s target unemployment rate?
In December, total non-farm U.S. payroll rose by 155,000. (Source: Bureau of Labor Statistics, January 4, 2013.) If we assume 155,000 to be the average monthly job creation in the U.S. economy, keeping everything the same, it will take about 38 months to reach the unemployment rate of 6.5%. (Source: Federal Reserve Bank of Atlanta, last accessed January 10, 2013.) In other words, 38 months of more quantitative easing—or another $3.2 trillion of more money printing!
What does this means for inflation? You guessed it: prices will rise even further. Remember; more printing means higher inflation.
Thanks to quantitative easing, like many others, I believe the real inflation rate is actually multiple times of that officially reported by the BLS. Quantitative easing has been disastrous to savers and those who live off a fixed income. Slowly, by the inflation it creates, it is taking a toll on the pockets of more and more Americans.
While the question in the mainstream financial media remains—“When will quantitative easing stop?”—I think the damage has been done. If not today, then in the very near future, higher inflation caused by too much money in the system will be very damaging to the U.S. economy.
Where the Market Stands:
We’re close to the end of the line, my dear reader. The bear market rally that started in March of 2009 is close to putting a top in.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi, Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.