According to Stanford University Economist John Taylor about 70% of all US Bonds last year were purchased by the US Federal Reserve. The Fed is not alone in these actions either, as the President of the ECB Mario Draghi declared himself ready to buy mountains of debt with this statement: “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”.

 

Accordingly,  one of the great questions on everyones mind is simply – what are the consequences going to be of Central Bankers being so involved in the marketplace?

 

To answer that question Michael Campbell asked a man whose opinion on North American interest rates, currency market trends and the gold market are in high demand. Dr.  Martin Murenbeeld BSc., MSc., PhD & Chief Economist of DundeeWealth Inc had some penetrating things to say about Central Bank actions.  

 

In short, despite the great concern that the Central Banks printing of money is going to lead to the destruction of currency and wild inflation:

 

1. The Big point is the deflationary forces so powerful that Quantitative Easing by the Fed and other Central Banks purchasing of Bonds hasn’t made a difference. “No one is overly concerned at this point, because the Quantitative Easing by the Fed and other Central Banks really have not raised inflation numbers above what is considered to be reasonable, like 2%. I would argue that in fact what the QE’s have done is kept inflation positive as opposed to it going negative. I know there is a lot of  criticism out there with respect to QE, that the economy is only eeking out 2% growth and it isn’t working. Well I’m saying just a minute, you could have been looking at -2%. In that sense I think its been a Godsend”. 

2. Net Net the Federal Reserve argues that they aren’t just printing up money electronically and using it to buy Treasury Bonds. They have a point says Martin as he points out that with the Fed’s last Quantative Easing, Operation Twist,  the Fed’s balance sheet didn’t go up much at all. Martin says that was because they were buying longer term treasuries while they were selling shorter term treasuries. Another respectable mind Dennis Gartman confirms that view when he stated “Well, the Fed is buying $40 billion to $45 billion worth of securities every month, but we forget that they’re also allowing about $35 billion to $40 billion—if not more—to mature off on the back end. So the monetary base has actually not grown at all in the course of the last year”.

3. Interestingly, Martin points out that the Fed is keeping the money supply up, which is basically what Milton Friedman, the most conservative economist of the last 100 years said the Fed ought to be doing. 

 

4. Martin says “that the surprise in all of this” is when Ben Bernanke announced his most recent Quantative Easing program on December 12th, the Stock Market and Gold didn’t do better. Despite the Federal Reserves intention to keep short-term interest rates near zero at least until the unemployment rate falls below 6.5% or projected inflation gets above 2.5%, neither the Stock Market or the Gold Market rallied. That tells Martin that there are some other things going on. “Certainly I think the fact that Bernanke stressed so much during his press conference his concerns about the Fiscal Cliff, that acted like a huge wet blanket on the Markets”.  Martin pointed out that the tax increases and spending cuts that could come out of the Fiscal Cliff negotiations are going to effect the economy in 2013. “No matter how you cut this cookie, there is going to be some Fiscal drag on the system because the US has to move from where it is now Fiscally, to to where it wants to be fiscally, which is a much lower Deficit”.  He points that out when he discusses Gold. “Gold is very sensitive to liquidity, and it turns out in fact that the ECB and the Fed both have not expanded their balance sheets much over the course of 2012 is one of the things that has been holding Gold back a little bit”.

 

 

5. The 64 Dollar question on the Fed buying of debt is what is going to happen down the road. “The real issue is how are the Central Bankers going to unwind what they have done. No one really knows. It all will depend on how suddenly the economy starts to pick up”. Basically if the economy recovers gently most argue that it won’t be an issue. On the other hand if all the money in the system suddenly starts to be lent out there could be sudden surge upwards in the economy and all of a sudden inflation is well about 2% and the Fed will be way behind the curve. 

 

 

6. Gold: From the Big Picture point of view Martin thinks we’ve got a downdraft in Gold that comes from slowing world growth and the recession and quasi depression in Europe. Opposing that you have an updraft in the Gold Market that comes from the monetary stimulus and reflation. “I have characterized this period as very similar to 2008. We had Gold prices going down 30% in 2008 on the back of the massive recession we had. We don’t have quite as large a recession today but we certainly have weakness. So that is holding Gold back. To get Gold rising we need more stimulus, and we need to see the effects of that stimulus show up on the balance sheets of the ECB and the Federal Reserve”. Martin is somewhat positive for 2013 that we will see the balance sheets of the Central Banks begin to expand. He points out that the President of the ECB, Mario Draghi, agreed to buy all of the debt of the week European countries but he hasn’t done anything so far because those countries haven’t asked yet. But Draghi does stand ready to buy that debt and Martin thinks that he will do it in 2013, which will expand the ECB’s balance sheet and be positive for Gold. 

 

 

Dr. Murenbeeld start his company M. Murenbeeld & Associates Inc. in 1978. The company moved from

Toronto to Victoria in 1989, where it continued to consult international clients on developments in the gold, foreign exchange and credit markets, and international economic trends before it was acquired by DundeeWealth Inc. in July 2004. The principals of DundeeWealth Economics have nearly 70 years of combined experience providing independent analysis and advice on economic and financial developments, with special emphasis on North American interest rate and currency market trends – and on trends in the gold market.