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US Monetary Policy is in Uncharted and Dangerous Territory

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As Americans beholden to the almighty dollar, we’ve all entered a new phase in our monetary existence. We’ve entered new ground, so to speak--a territory uncharted, but one that may not be as favorable as we had hoped.

US fiscal and monetary policy is focusing all its efforts, using all its leverage, to uphold an economy that has NOT yet even reached the beginnings of a new recessionary cycle.

Think about it. What’s typically deployed as an “emergency measure” to save an economy under strain is now being deployed to sustain an economy in its normal cycle.

In other words, the artificial intervention has become a necessary factor in maintaining natural movement, as medication does for a chronically-ill patient. 

So what does this mean for the US dollar? Pressure, strain, devaluation. How can it not?

The nation is already dealing with a budget deficit that currently stands in the Trillions. And it appears as if the perpetual cycle of borrowing and spending is the name of the game in the swamps of DC.

Now, with another presidential election cycle coming up in 2020, amid the still-unresolved international trade disputes, President Trump wants to see the dollar move in one direction--that is down.

The Federal Reserve, whose independence is questionable at best, appears to be following suit with President Trump’s wishes. Remember how Trump criticized the Fed as it attempted to unload its balance sheet (raising rates). Since then, we’ve had three rate cuts.

The acronym QE (Quantitative Easing) is a dirty word among most Americans and just about all sound money advocates.

The Fed may not be acknowledging “QE,” but they’ve been pumping Billions of dollars into the repo markets which, arguably, are undergoing a severe liquidity crisis--a fire they can’t seem to put out.

They lost control of their own benchmark rate, as repo rates--typically hovering around 2%--skyrocketed to 10%.

So the Fed countered that with “temporary” injections of liquidity, $50 to $75 Billion a day.

That began last September. Temporary, short-term--it’s still going on now. This October, the Fed extended its repo operations to January of 2020, hoping that by this time, the fires will have been put out.

For all practical purposes, these Billion-dollar injections define “QE” in every aspect of the word.

Take it from Morgan Stanley strategist Kelcie Gerson: “Temporary repo operations will not prove to be a sufficient long-term solution to the recent funding pressure. Ultimately, the Fed will need to increase the size of its balance sheet permanently.”

Operative words: increase balance sheet and permanently.

Remember when the Fed raised rates this year, a balance sheet trim worth $600 Billion?

Guess where that’s going in 2020--back into the balance sheet. What was the point of that odd and seemingly indecisive cycle?

Perhaps the Fed decided that the direction rates should go is not up but down. But how low exactly?

Former Fed Chief Alan Greenspan forecasts that pretty soon we’ll be sinking to negative rates--that is below zero.

Rates in the negative zone, in case you didn’t know, is where you get penalized by the government for holding money in the bank.

An Optimal Monetary Environment for Gold and Silver

If you’ve been following gold and silver over the last few months, you’ve likely noticed that both metals have been rallying.

Interestingly, the US Dollar Index hadn’t completely broken down despite the rally (apparently, there’s still a great deal of faith in the almighty dollar).

And of course, gold hasn’t been the “talk of the town,” and why should it be...the stock market has been skyrocketing to record-breaking highs.

How long can the stock market party last? Actually, it might go up even further, especially when the Fed’s easing policies begin to exhibit its longer-term effects.

But then you’ve got the dark corners of the repo markets--the one crisis that the investing public seems to be completely unaware of. Any further problems in that market can be contagious.

If anything, we’re going to see volatility spike up, causing major turbulence in the stock market, all of which will generally lead the market and economy downward.

Most precious metals investors know that both gold and silver follow their own fundamentals. But they tend to get a boost when fear takes hold of the markets. That’s why it’s popularly called the “fear trade.”

All it takes is for investors to begin fearing that their hard-earned dollars are quickly losing purchasing power, and gold and silver step in for the reckoning.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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