Tuesday, April 10, 2012

Quantitative Easing, Inflation for Jobs

There are rumors of implementing the third round of Quantitative Easing delivered by the Federal Reserve. This third round aptly known as QE3. The possible implementation will be delivered based on how the economy performs moving forward. Currently, U-3 Unemployment levels are at 8.3%, while U-6 unemployment levels are at 14.5%. GDP trended up 3.0%. If the economy trends upwards, and unemployment goes down, will the Federal Reserve implement QE3? The answer: Probably not. If the economy continues to be stagnant, or goes down, look for the implementation of QE3. If this happens what does this mean? It could mean inflation, simply to lower the unemployment rate.

Right now, Fed has been purchasing up Assets(see the chart). Since 2008, the Central Bank's assets have grown well over 200%.  In the Bloomberg article, "To QE3 or Not to QE3?", here is a key excerpt: 

"The Fed is now sitting on a balance sheet that has ballooned to $2.89 trillion after three and a half years of aggressive bond-buying activity" 

The rationale behind this aggressive asset purchase is rooted in an attempt to increase aggregate demand.  If the Fed can purchase more Government securities, keep the interest rates low, and pump more money into the system, the objective is to have more spending by consumers. And, the other objective is to lower the unemployment rate.

The problem is that this action creates inflation, as witnessed by a depreciating dollar, and a spike in Commodity prices:e.g Gold. (see chart with current Gold Prices)

Gold typically has been used as a hedge against a depreciating currency. It is a good indicator of how the currency is depreciating or if inflation is around.

This leaves the Fed at the paradox: Should they continue with their quantitative easing strategy to "stimulate" the economy? If so, what is the cost of this action? Is it worth higher prices from a depreciating currency? People may have lower unemployment levels, but at what cost? Higher Gas and food prices?

If you are saving for retirement, how does this impact your portfolio? When you "cash" out your monies from your qualified accounts(401k, 403b, and the like), how long will your money last if the currency is being depreciated?

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