There’s No Turning Back on QE

Fourth and finally, the Federal Reserve has boxed itself into a corner. Quantitative easing (QE) is a one-way proposition; there is no practical reversal from QE, as newly printed money has boosted the price level above where it otherwise would have been.

Reversing QE would bring about dreaded ‘deflation’. Any exit strategy from QE exists purely in academic models. In reality, reversing QE (selling bonds and draining cash from the financial system) would crash all of today’s manipulated financial markets simultaneously.

The Fed’s goals early on in the crisis focused on supporting the banking system at the expense of savers. Now the Fed will be pressured, threatened, and eventually forced to monetize ever more U.S. government debt – all to finance a government budget that the private sector cannot afford.

As a proponent of small, affordable, sustainable – there is a nice buzzword – government, I lament that voters have chosen a government stuck in a destructive, self-reinforcing cycle. Time will tell if this cycle (more government, market failure, more government, market failure…) can be stopped.

The future political environment will multiply the risks facing investors. But there will always be opportunities for contrarian investors on both the long and short sides of the market…

On the long side, look at the best-managed gold and silver mining companies, and companies providing ‘shale fracking’ services and equipment for the American oil boom.

On the short side, look at overindebted companies that, in order to survive, need consumers to continue overspending. Also, look to short companies that pay high prices for raw commodities and resell processed goods into a depressed economy.

Dan Amoss Contributing Editor, Money Morning

Publisher’s Note: This article first appeared in Laissez Faire Today