"Unlimited QE3" Quick Analysis: Federal Reserve Attacks US Dollar, Risks Currency Warfare
by Daniel R Amerman, CFA
Below is the 2nd partof this article, and it begins where the 1st part which is carried on other websites left off. If you would prefer to read (or link) the article in single page form, the private one page version for subscribers can be found here:
Hidden Taxes & A Devastating Blow To Retirement Investors
Consider two promises the Federal Reserve just made:
1) That it will create money out of thin air on a massive scale for as long as it takes until substantial improvements in the labor market occur; and
2) That near zero short term interest rates will continue until at least mid-2015, even as interventions in the long term bond market will also hold long term interest rates down.
In other words, inflation goes up (whether officially captured in inflation statistics or not), and interest rates are forced even lower, for a longer period of time. There is a term economists use for this process: "Financial Repression".
As I explain in detail in my article, "Financial Repression: A Sheep Shearing Instruction Manual" (linked below), Financial Repression is a strategy deployed by governments with large debts which involves deliberately creating rates of inflation that are higher than interest rates, and in the process taking wealth on a wholesale basis from individual savers across the nation. It has been used by many nations over the decades - because it works. And the Federal Reserve has just kicked Financial Repression into overdrive with QE3.
http://danielamerman.com/articles/2011/RepressionA.htm
Another way of understanding the benefit to the government is that the higher the real inflation rate, and the lower the interest rates in a nation, then the higher the hidden tax on savers. As developed in step by step detail in my article, "Hiding A $500 Billion Tax On Savings: How The Government Deceives Millions" (linked below), the government already takes half a trillion dollars a year from the population in a hidden tax. This is a highly uneven and unfair tax, that primarily targets retirement investors and other older citizens who hold the majority of the nation's interest-bearing savings accounts and other fixed income investments.
http://danielamerman.com/articles/2011/SaveTaxC.html
What the Federal Reserve just did was impose yet another massive (albeit hidden) tax increase onto the savers of America, with most of the pain being reserved for the Boomers and retirees.
Indeed, what currency warfare and the hidden taxes imposed by inflation have in common is who pays the price. It is older Americans in general, and retirement investors in particular, that are the true victims of QE3.
The many interrelated ways in which QE3 will serve the interests of the government - while impoverishing many savers - are summarized in my article linked below, "Five Reasons Why The Government Is Destroying The Dollar".
http://danielamerman.com/articles/2012/FiveC.html
The Fed & ECB Follow The Workshop Script
This final section is for those who attended my workshops earlier this year. The European Central Bank and the Federal Reserve are following almost to the letter the "script" I explained for how a Euro-led global economic meltdown could be avoided through instituting the combination of global quantitative easing and global financial repression.
The European Central Bank has agreed to purchase the bonds of member states and lower interest rates, as we discussed (slides are from the presentation).
This unshackling of the ECB and giving it more Federal Reserve-like powers has at least temporarily alleviated the Euro crisis, as we discussed.
And in a desperate attempt to reboot US employment, the Federal Reserve began a massive assault on the dollar almost the moment that the Euro situation somewhat stabilized. As we discussed.
In this case it was the German court's clearance of the expansion of power for the European Central Bank that was the last step needed for at least interim stabilization, and the Federal Reserve savagely attacked the US dollar within one day.
Rampant political risk remains in the system, and the continuation of events following my global financial repression "script" can't be assured. That said, there has been a narrowing of possible alternative futures now that the politically difficult (and therefore uncertain) key changes have indeed occurred in Europe and the US as anticipated, and the risks for retirement account and precious metals investors have substantively increased, even as the importance of the new alignment and political risk mitigation strategies have increased (the asset of choice for the Fed to purchase is particularly worth noting with regard to our tiered alignment strategy discussions).
