The Impact of $100 Billion a Month in Quantitative Easing

Wall Street is going wild with new quantitative easing talk. However, as the Street moves to front-run Ben Bernanke, one perspective is very much understood: QE2 will be nothing like we’ve ever seen before. The new quantitative easing will be monstrous, persistent, and of a size, scope and direction never before seen.

What’s New in QE2?

While Ben Bernanke and his cohorts have run the printing presses before to the tune of $1.25 trillion to buy mortgage-backed securities and some treasuries, a new program will purchase US Treasuries exclusively. A number of independent analysts now expect that the Federal Reserve will run a perpetual program based on sustained, direct purchase of US government debt from the Treasury Department.

As for how much quantitative easing is to be expected, $100 billion per month seems to be the consensus. Why $100 billion per month?

A $1.15 Trillion Deficit

The Federal Reserve, through its second round of quantitative easing, will be purchasing exactly as much government debt as is created in all of the fiscal year 2011. That is, the Federal Reserve will singlehandedly buy all US debt in 2011 should it decide to target easing equal to $100 billion a month. Or, in other words, the Federal Reserve will monetize our debt, printing enough money as is needed to maintain an effectively balanced budget.

The monetization of all debt is monumental. Unlike the first quantitative easing program, where the funds were essentially locked into bank reserves, the new program will create one circulating dollar for each month of easing. By the fall of 2011, the money supply at the M1, and M2 levels could explode, with a minimum of 14% inflation in the M2 money supply with absolutely zero after the fact multiplier. Heavier spending, more lending, and a multitude of other factors could produce inflation rates several multiples larger than the 14% lowball.

No Exit

The Federal Reserve maintains positions with average maturity of six to seven years in its portfolio, practically indicating to the world that it has little interest in short term exits and will stay in government debt for as long as need be, presumably forever.

New action by the Federal Reserve will most likely occur in the longest dated bonds possible, as purchasing these bonds provides the best return to the government. (The yield curve brings higher rates on 30 year Treasuries, saving the government more in financing costs than purchases of short term debt.)

Most expect that the Federal Reserve will announce the next stage of the quantitative easing program immediately following the elections. Such a move would help mask political risks and give consumers more confidence heading into the Christmas season. As stated previously, the inflationists at the Federal Reserve desperately need more spending, more consumption, and more monetary expansion from bank reserve levels (M0) to savings levels (M2).

Start preparing for the move by allocating more holdings into precious metals. With the money supply sure to explode by a minimum of 14%, assuming a $1.2 Trillion QE2, there is still very much to gain in hard assets, particularly metals like silver.

By Dr. Jeffrey Lewis
Silver Coins Are The Investment Opportunity Of A Lifetime