The Federal Reserve's third round of bond purchases will likely have to last through 2013 until it can achieve improvement in the labor market, said Charles Evans, the president of the Chicago Fed Bank, on Monday. "I frankly think it is going to take almost a year to see the type of improvements in labor markets that I am expecting," Evans said in an interview on CNBC. Evans, a strong backer of QE3, will be a voting member of the Fed's interest-rate setting committee next year. The Fed's QE3 program does not have a set end-date. Evans said he supported boosting monthly asset purchases under QE3 to $85 billion yearly next year. At the moment, the Fed is purchasing that amount of Treasurys and agency mortgage-backed securities but $45 billion of those purchases is set to end in December when the central bank's Operation Twist plan ends. If the Fed did not take any action to boost bond purchases after the Twist plan ended, that would be a "step down," Evans said. – MarketWatch
Dominant Social Theme: Markets run on their own and central banks merely guide them.
Free-Market Analysis: The video here provides us with a succinct summary of the effects of QE2 – beyond what may be questionable impacts on labor.
The big news: The money supply will expand and as it does all sorts of assets will inflate – money metals chief among them. It is certainly possible that stock markets will continue their manipulated climb. The Dow itself has doubled since the Fed began its regime of easing and this latest variant, QE3, may continue the process, especially as it is being cast as "unlimited."
Asset inflation is not something that is about to occur ... it is already here with such ferocity that there are increasing numbers of top people speaking of a return to a formal (state-run) gold standard as the only solution.
Of course, we are on record as opposing a state-run gold solution. Any kind of state-run mandate is a form of price fixing and distorts both the economy and the product it focuses on. We're in favor of private solutions. Let the market fix the price and value of money.
The damage central banks have done to the West's larger economies should be obvious to everyone now – and we notice that all pretense of subtlety has been cast aside. The mainstream media doesn't even pretend that central banks are adjuncts to the market itself.
Now central banks – specifically the Fed – are cast as market saviors. Each misstatement of economic reality is reported as if it were unalterable insight.
We once estimated that to deal with the current "crisis," central banks would dump a full US$100 trillion into the world economy. In adding it up, we figure central banks are more than halfway there.
The Fed itself has admitted to some US$16 trillion in "loans" around the world to financial institutions in 2008 and beyond. Most of those loans have never been repaid, apparently.
Really, these numbers are impossible to comprehend. And they are a reason to be very wary when it comes to the future.
Many people – even long-time investors – don't truly "get" how inflation works. Not only is the volume of money important but also its circulation.
Right now billions – trillions, really – are trapped one way or another within metaphorical bank vaults. It is not until these funds are lent that money will circulate in earnest, causing price inflation.
Another important point is that demand stimulates lending. While articles have been written about banks not lending for a variety of reasons, part of the inflation issue involves consumer demand.
When consumers are ready to borrow, presumably banks will lend. At that point, price inflation will move up rapidly.
Of course, price inflation is with us today and is surely being understated. But that is nothing compared to what is in store tomorrow.
It really is not all that complicated, though the prognosis is anything but a happy one. Tomorrow we will face the storm that central banks are seeding today.
In the meantime, many of today's assets are almost bound to appreciate at some point ... at some level. This short video makes that clear.
(Video from TheStreetTV's YouTube user channel.)