There may not be another round of Quantitative Easing announced on Thursday, but Peter Schiff of Euro Pacific Capital, says it's only a matter of time. "QE3 is coming eventually," Schiff, author of the book The Real Crash, tells me in the attached clip. "Whether the economy gets its fix next week or this week or a couple months from now, it is coming."
Lest there be any confusion, Schiff regards the inevitability of a new QE program as a bad thing. He's not anti-stimulus as much as he is pro-reality. When the Fed keeps the funds rate between 0 and .25% it's effectively making money "free" for the government. Any asset you can think of is ultimately priced based on this phony rate.
What makes guys like Peter Schiff so irate is that the Fed's policy makes it impossible to correctly price anything from your mortgage to your JC Penney (JCP) stock or even your gold bricks. Arbitrarily setting rates at zero is akin to making Q the first letter of the alphabet. Anything you knew to be "orderly" is instantly rendered false.
Nothing fake can last forever and the longer you avoid truth the worse the day of reckoning becomes. As Schiff puts it, "as long as the Fed is doing QE, this recession, and I call it a depression, is going to get worse and worse and worse."
The Dow may make new highs and your portfolio could look good, but the real value of what you own is based on the artificial environment. Once the rug gets pulled out, which must happen eventually, the adjustment will be brutal.
In Schiff's dream world Bernanke would declare the zero percent rate party to be over now and let rates find their own level without government involvement. The fact that he won't do it is a reflection of both Bernanke's belief that it's not in the best interest of the economy and the political risk associated with radically changing monetary policy.
Keeping rates near zero percent may be good politics for Bernanke now but Schiff argues that it's going to be lousy for his legacy and ruin the economy. If Bernanke wants to be remembered as a tough-love Chairman like Paul Volcker and not an empty suit like Alan Greenspan, he'd be wise to sit on his hands come Thursday.
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