In the early days of the 2008 financial crisis, the Federal Reserve said, “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” (Source: Federal Reserve, March 18, 2008.) As a result of this, the central bank came up with the idea of printing paper money to stimulate the economy; thus, “quantitative easing” was born.
Five years later, the Federal Reserve’s balance sheet has grown to $4.2 trillion. We also saw the U.S. government increase spending to stimulate the U.S. economy after the Credit Crisis of 2008. The U.S. national debt skyrocketed from around $9.0 trillion back then to over $17.0 trillion today.
With all this money being created (by the Fed) and borrowed (by the government), the logical assumption is that there’s finally economic growth in the U.S. economy.
Paper money printing by the Federal Reserve and out-of-control spending by the government hasn’t really given much of a boost to the U.S. economy (aside from the stock market bubble it has created). Problems still persist. The amount of paper money that has been printed out of thin air is huge—an unprecedented event in American history.
Now that the Federal Reserve is putting the brakes on quantitative easing (it will print less money each month), will we see businesses pull back on capital spending? Of course we will. When money is tight, businesses pull back on research and development, expansion, and acquisitions.
Consider this: since December of last year to this past February, new orders for capital goods (excluding the defense industry) in the U.S. economy have declined by 2.8%. (Source: United States Census Bureau, March 26, 2014.) Shouldn’t that number be going the opposite way if the economy is improving?
And the biggest part of the puzzle: quantitative easing hasn’t completely come to an end! What happens later in the year, when the Federal Reserve projects it will no longer be in the money-printing business? I’m concerned businesses will pull back on capital goods orders even further, putting downward pressure on the U.S. economy.
Across the board, economic data suggest the U.S. economy won’t be growing as rapidly in 2014 as many had expected.
I believe the U.S. economy won’t be able to withstand the elimination of paper money printing by the Federal Reserve and that at some point, the Fed will need to reverse its tapering policies and start printing again to stimulate the U.S. economy. That’s when you will see the price of gold really take off.