Is the Federal Reserve Playing With Fire?

The Federal Open Market Committee (FOMC) decided this week to keep quantitative easing and easy monetary policy going. The statement by the Federal Reserve said, “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Source: Federal Reserve, October 30, 2013.)

I’m one of those economists who believes the longer this goes on, the more troubles we are going to see. Is the Federal Reserve playing with fire?

It’s been almost five years since the Federal Reserve introduced the idea of quantitative easing to the U.S. economy. The goal was to help spur the economy and to help the average Joe, who, at the end of the day, lost his job and his house.

Has that happened?

It’s very clear: quantitative easing and the easy monetary policy that the Federal Reserve has been implementing for some time haven’t really filtered down to the average American. But it is helping the big banks; we have seen their profits grow significantly since 2009, while the average consumer has seen his/her real wages decline. Those who are closing in on retirement are forced to stay longer in their career or rethink their options because their savings have either been depleted or haven’t grown enough.

And we are seeing consumer confidence slide lower. This is the exact opposite of what the quantitative easing was supposed to do. For the week ended October 27, the Bloomberg Consumer Comfort Index declined to the lowest level in more than a year. The index tracking consumer confidence stood at negative 37.6, plunging from negative 29.4 a month ago. (Source: Bloomberg, October 31, 2013.)

Economics 101 suggests that when you have an abundance of money supply, you have inflation. The Federal Reserve has been doing exactly that through the help of quantitative easing and keeping interest rates lower. Take this as an example: in just the last few years, the Federal Reserve has printed more than $3.0 trillion of new money out of thin air, and it continues to print another $85.0 billion a month.

And we are starting to see inflation creep up into the U.S. economy. Mind you, the official numbers don’t show this, but if you ask the person who shops, they will tell you how goods and services are getting more expensive.

With all this, I hear the mainstream talking heads speaking against gold. They say the yellow metal doesn’t hold any value any more and it’s not useful. It may be a hedge against inflation, but we currently don’t have any, say the “official” figures. Unfortunately, the mainstream forgets money continues to be printed by the Federal Reserve and the taper talks have diminished.

The Federal Reserve is playing with fire, hoping it will not get burnt. All of this keeps me bullish on gold bullion and negative on the U.S. dollar.