Equity markets around the world Wednesday expressed their distaste for the possible end of the Federal Reserve's quantitative easing (QE) policy. Share prices tumbled from New York to Tokyo. Here's what every investor needs to know.
The financial world was shocked this month by a demand from Germany's Bundesbank to repatriate a large portion of its gold reserves held abroad.
By 2020, Germany wants 50% of its total gold reserves back in Frankfurt - including 300 tons from the Federal Reserve.
The Bundesbank's announcement comes just three months after the Fed refused to submit to an audit of its holdings on Germany's behalf. One cannot help but wonder if the refusal triggered the demand.
Either way, Germany appears to be waking up to a reality for which central banks around the world have been preparing: the dollar is no longer the world's safe-haven asset and the US government is no longer a trustworthy banker for foreign nations.
It looks like their fears are well-grounded, given the Fed's seeming inability to return what is legally Germany's gold in a timely manner. Germany is a developed and powerful nation with the second largest gold reserves in the world.
If they can't rely on Washington to keep its promises, who can?
Investors will be looking to the Federal Reserve Wednesday for clues about how long it might continue its bond-buying program aimed at pushing interest rates down.
The Federal Open Market Committee is expected to release a policy statement at 2:15 p.m. Wednesday, the second day of its two-day meeting.
In keeping with a practice it began last January, the first meeting of the new year will highlight the FOMC's long-term goals and monetary policy.
The Central Bank likely will reiterate the goal it has maintained all of last year: boosting the stagnant U.S. economy.The Fed's first meeting of 2013 comes after an extraordinarily busy year, capped by two key moves in December.
That's when the Fed said it would continue spending $85 billion a month on bond purchases to keep interest rates low. At the same time, the Fed set unemployment and inflation "thresholds" instead of a date when the central bank expected to be able to raise interest rates.
Amid all of the hoopla over the Standard & Poor's 500 Index touching 1,500 on Friday, it seems few people noticed that the yield on 10-year U.S. Treasury bonds has risen to within a couple of basis points of 2%. That is nearly 30 basis points higher than it was one month ago and 10 basis points higher than one year ago.
It seems as if the bond market is beginning to price in higher inflation at the long end of the yield curve, and that is something that has got to be worrying the Fed.
Successive rounds of quantitative easing (QE) have added a lot of liquidity to the U.S. economy and this has been repeated globally with massive amounts of liquidity being pumped into the market by the Bank of Japan (BOJ), the European Central Bank (ECB) and the Bank of England (BOE).
The Bank of Japan has committed itself to further aggressive easing under pressure from the newly elected government headed by Prime Minister Shinzo Abe. Even if BOJ Governor Masaaki Shirakawa has any second thoughts about additional easing, he will keep them to himself.
Minting a trillion-dollar platinum coin to pay our debts may seem ridiculous. But in fact, our government has done the same thing for the past five years, creating more than $1 trillion out of thin air each year.
After four years of quantitative easing programs, including QE3 just last fall, U.S. Federal Reserve officials have started voicing doubts about its effectiveness and concerns that it is distorting the markets.
And it's not just the Fed's hawks, such as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, speaking out against the bond-buying extravaganza.
Doves like Atlanta's Dennis Lockhart and moderates like Kansas City's Esther George have expressed concerns about QE3 as well.
"I do think the growth of the Fed's balance sheet could have longer-term consequences that are worrisome. While I've supported these policy decisions to date, I acknowledge legitimate concerns," Lockhart said in a speech in Atlanta on Monday.
According to the minutes of the December Federal Open Market Committee (FOMC) meeting, several members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."
If in fact sentiment within the FOMC is turning against QE3, then the easy money spigot that has helped fuel the stock market and other investments could be switched off sooner than most expected, which could have a sharp impact on the markets.
It was conceived in 1910 and constructed for the benefit of the private bankers who control it. Congress blessed the scheme in 1913 with passage of the Federal Reserve Act.
These days the Fed doesn't just backstop America's too-big-to-fail banks. It has expanded its doctrine of socializing banking losses globally.
The Fed helped bail out private businesses, foreign big banks and central banks in Europe and Japan in the credit crisis of 2008 and is the model for the European Central Bank, as well as the ECB's primary backstop.
To understand how the Fed gets taxpayers around the world to pay the losses its member banks routinely incur, let's pull back the curtain on the Fed and explain how it operates.
Here's What the Fed Really DoesBanks lend money and sometimes they don't get paid back. That's not a problem if it doesn't happen too often and if profits from other loans and investments cover the loan losses.
But since banks have gotten really big and have to make big loans (due to economies of scale and return on capital expectations) they need big borrowers. There are no bigger borrowers on the planet than governments, and that's where a lot of banks are lending.
Of course, governments aren't immune to over-borrowing and insolvency.
All the big banks that lent to banks in countries now in financial straits continue to lend to them because if they don't they won't get paid back what they are owed. Banks would fail from a cascade of losses and would either have to be bailed out or shut down.
That's where the Federal Reserve comes in.
Getting, as in up the you-know-what!
I'm talking about getting socialism shoved up our capitalist backsides, for one thing.
It's simple: We are about to go over the so-called fiscal cliff. Why? Because Congress can't figure out how to stop spending money it doesn't have.
Forget the whole revenue side of the equation. It's only part of the mix of fixes, and the only fix that matters ain't fixed.
Stop spending money you don't have and you don't have to tax people more to pay for a bunch of crap they don't need, don't want, and don't even know they're getting.
Oh, that would be because on top of what we are getting there's even more that we're not getting.
Congress' paymasters are getting pork and beans for whatever they want because that's how our Congress gets elected, by greasing the wheels of insiders to get taxpayer money for their private purses, enough to plentifully pay for campaigns.
But that's only the "private" side of spending.
The spending scheme has mushroomed by expanding (and paying sickeningly outrageous wages and benefits) an ever-growing number of government workers.
And by expanding entitlements beyond what we are entitled to. And by expanding welfare and "social programs."
Yes, I am including 99 weeks of unemployment, and accompanying food stamps, and free money for unwed mothers to have more kids so they can collect more free money, and free day care, and all the other free stuff that ain't free if someone (that's you and me) is paying for it.
All that spending creates a class of people, a voting class. And, guess what they vote for?
Duh, that would be more free stuff.
So what's this got to do with the Fed?
I'm glad you asked...
First, the central bank said it would increase the amount of quantitative easing by replacing Operation Twist, which ends Dec. 31, with outright purchases of long-dated Treasury bonds.
Under Operation Twist, every month the Fed sold $45 billion in short-term Treasury bonds and notes and bought $45 billion of long-term Treasury bonds in an effort to keep long-term interest rates low.
Because the Fed funded its purchase of long-term bonds with the sale of short-term bonds and notes, no new money was created.
However, outright purchases of long-term bonds will create new money-$45 billion every month-and, by concentrating its buying at the long end of the yield curve, the Fed should be able to keep long-term interest rates low.
The Fed also said it will continue to purchase $40 billion of mortgage-backed securities each month, creating a total of $85 billion in new money from these operations monthly.
That means QE4 is here.
Starting in January, the Fed will be more than doubling the amount of money it is pumping into the economy. Happy New Year!
Second, the Fed set unemployment and inflation "thresholds," instead of setting a date for when the central bank expects to be able to raise interest rates. What this means is that the Fed will not raise interest rates unless unemployment is 6.5% or less or inflation is more than 2.5%.
By setting thresholds where monetary policy might change, the Fed is attempting to improve its communications with the public.
And in an additional unprecedented move from the central bank, interest rate decisions will now be tied to the unemployment rate and inflation.
About a half hour into the release, the Dow Jones Industrial Average staged a near 65-point rally - but then lost that gain and ended down nearly 3 points at 13,245.45.
Here's a breakdown of the FOMC meeting outcome.
Today's FOMC Meeting: QE4As expected, the FOMC meeting ended with a replacement for Operation Twist, the expiring program introduced in 2011 of swapping short-term Treasuries for longer dated ones. The goal of Operation Twist was to lower long-term interest rates to stimulate the U.S. economy.
The new asset purchase program is an extended arm of the Fed's familiar quantitative easing programs, and has thus been dubbed QE4.
Now with QE3 and QE4 together, the Fed will purchase a whopping $85 billion a month of Treasury securities, stacking the Fed's portfolio with government-backed investments for an extended period.
The buying spree will remain intact until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% for two years out.
The Fed also left interest rates at rock-bottom historic lows near zero, as was also expected.
While these moves were widely expected, what wasn't expected was the Fed's forward-looking guidance.
The consensus is that the Fed will purchase an additional $45 billion of bonds from the secondary market each month.
That means the Fed would replace the monthly $45 billion used to swap short-term Treasuries for long-term Treasuries under Operation Twist, which expires at the end of this month, with outright bond purchases.
In addition to the $45 billion a month used in Operation Twist, the Federal Reserve Bank has been purchasing $40 billion of mortgage-debt securities monthly in its continued effort to boost growth.
In total, the market expects the Fed to continue to purchase $85 billion worth of bonds on the secondary market each month for the foreseeable future.
Now some investors fear the Fed with QE4 will seal the deal on skyrocketing inflation - but it takes more than increased money supply to raise prices.
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As central bankers gathered Tuesday for the last policy meeting of the year, expectations were high that Fed Chief Ben Bernanke and his cohorts will announce a large scale asset purchase plan to replace the soon-to-end Operation Twist, introduced in September 2011.
The Fed hopes additional stimulus will finally boost growth and the employment level. With the current unemployment level at an elevated 7.7% -- a number that economists say will be revised higher in the coming weeks - the weak labor market remains a grave concern.
At recent meetings, the Fed indicated that it will continue QE3, the policy of buying $45 billion in mortgage-backed securities each month until it sees a significant and sustained improvement in the employment scene - which is unlikely to come anytime soon.
Together with Operation Twist, the two programs added some $85 billion in long-term bonds to the Fed's balance sheet each month.
The aim, the Fed said in a statement, "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
The central bank has also stressed it would employ its other policy tools "if the labor market does not improve substantially."
While the Fed did not elaborate on what those tools are, it maintains it still has plenty of ammo left and stands ready to pull the trigger when and if necessary.
It looks like now is the time.
The untold story is that when the Federal Reserve is done transitioning the United States from capitalism to socialism, the few dozen banks that remain in America will all be profitable until they need bailing out again, but will never die and live on in infamy.
Is that just hyperbole or some wild conspiracy theory? It's neither. Unfortunately, it's the bare, naked truth about the Fed.
It doesn't matter that you didn't know the Federal Reserve System was the brainchild of a handful of the world's most powerful bankers.
Or that all of them took a secret train from New Jersey to Jekyll Island, Georgia (owned by J.P. Morgan) in 1910 aboard Rhode Island Senator Nelson Aldrich's private car to devise and orchestrate the creation of the Federal Reserve.
Or that Aldrich was an investment associate of J.P. Morgan, that his son-in-law was John D. Rockefeller, Jr., or that he was the political spokesman for big business and banking interests in Congress.
It doesn't matter if you don't know who the powerful bankers are today that run the Fed's twelve district banks. Or that the Fed's New York Bank conducts all its open market operations with a bunch of favored big banks it protects (Case in point, MF Global).
Or that one former Chairman of the New York Bank's Board, who was also and still is a Goldman Sachs board member, resigned from the Fed when it was discovered he bought $3 million worth of Goldman's stock right before the Fed made sure Goldman wouldn't have to go out of business at the height of the financial crisis.
What matters, is that without the Federal Reserve the banking system in the United States would be more honest, more competitive and less of a risk to the economy than it is now.
And what really matters, is understanding the Federal Reserve could never exist and do what it does in an open democracy, and that its agenda of socializing risks (making taxpayers eat bankers' losses) and privatizing their profits (letting them keep their bonuses) for the benefit of its club members (the banks) means the Federal Reserve has to transform America to a socialist model in order to maintain its own growth and ultimate power.
Of course, it's not a stretch to see how the Fed's socialist agenda will eventually encompass most of the American economy over time.
But to keep it simple, let's look at how the Fed has already done that to the benefit of its primary constituents: banks and bankers.
But if you take any time to learn how the Fed really works and in whose interest they operate, you'd make yourself sick for a long, long time.
The truth about the Federal Reserve is that it's a dangerous, insidious socialist tool.
Rather than allowing free markets to function as a "clearing mechanism" that rewards success and punishes failure, the Fed fosters underdevelopment of third-world nations, props up corrupt governments, protects the greedy, self-serving banking constituency it serves, and by design promotes socialism to further its mandate to enrich its masters.
I'm sick of the Fed and their control over the U.S. Congress, the American economy, and the world order.
It's about time the American public revolted against the Fed and our pandering Congressmen who pimp for it, abrogated their Constitutional duties to it, and get rich off it, all the while pretending they control it and it's some kind of Constitutional safeguard.
The Untold Story About The Federal ReserveYou see, the Fed was the brainchild of a bunch of the world's most powerful bankers and a few greedy U.S. Congressmen who were not surprisingly in the employ of banker backers.
The history of the Fed is a fascinating story about American politics and power-broking bankers.
The undisputed truth about the creation and mandate of the Federal Reserve System is laid bare, beautifully I might add, in G. Edward Griffin's The Creature from Jekyll Island.
I thought I knew a lot about the Fed, and it turns out I do. But there is so much more that I didn't know, and it's all laid out in the book, with all the accompanying references and proof.
It chilled me to my very core...
And even if Obama replaces Bernanke when his term ends in January 2014, he's likely to choose another soft-money acolyte like Fed Vice-chairman Janet Yellen to lead the Fed.
For believers in sound money like me, that's something of a gloomy prospect.
As for the rest of the world, the prospects for higher interest rates don't look too good, either.
However, on Monday I did catch a glimmer of light when it was announced the Bank of England's new Governor is going to be Mark Carney, the former head of the Bank of Canada.
Now I'll be the first to admit that, at first glance, Carney doesn't look too promising.
He did, after all, spend 13 years at Goldman Sachs (NYSE: GS). And we all know the track record of Goldman Sachs has been nothing short of appalling.
The bank itself made a bundle by shorting the housing market on the way down and persuaded its alumnus Hank Paulson to bail out its dodgy AIG credit default swaps with $13 billion of taxpayer money.
However, the truth is Carney has been out of Goldman since 2004, and his track record at the Bank of Canada has been very good indeed.
To Carney's credit, he didn't cut interest rates as far as the Fed and has actually raised them part of the way back. What's more, Carney only did $20 billion of "quantitative easing" bond purchases in 2009, at the height of the crisis, and has since sold the extra bonds back to the market.
In the aftermath, Canada's economy has notably outperformed the U.S. economy over the last five years, and continues to do so even though house prices there are currently looking wobbly.
Ben Bernanke could learn a thing or two here.