THB Big Joe

Posted: Saturday, October 23, 2010 4:24 pm

For The Herald Bulletin Herald Bulletin

The Federal Reserve is actively engaged in Quantitative Easing. Most economists believe the Fed will announce at its meeting on Nov. 2-3 that it will be printing dollar bills and buying long-term treasuries.

The media is calling this QE2, which it is, but it is actually different from QE1 (launched March 2009). QE1 never really involved any printing of money. It’s different this time.

During the first round, the Federal Reserve simply borrowed what cash the banks were hoarding and re-circulated that cash by buying mortgages. The paradox is that this actually served to be deflationary as opposed to inflationary. The plan failed at least on that front.

The new plan appears to be under way. Our Federal Reserve will print cash and give to the Treasury to maintain its deficits.  It doesn’t seem to be waiting for the meeting to start printing. The U.S. currency in circulation has risen 6.9 percent in the past 13 weeks!

The end goal is pure and simple, in our opinion. The bankers at the Federal Reserve will do anything and everything they can to prevent asset deflation. The publicly-stated goal and hope of QE2 will be that people will get back to work as the federal government is finally able to create jobs and inflation. Regardless, the monster in the closet is prices falling on assets now held as collateral.

Please understand that the Federal Reserve is not a government entity. It is a group of bankers who happen to be in charge of our monetary policy in the United States with two official mandates: full employment and price stability. Hyper-inflation is difficult for the Fed to manage, but deflation is an entirely different beast. Think about what you pray for at night. What wouldn’t you do to answer those prayers on your own if you had the power to grant the request? The Fed’s prayer is for the inflation of asset prices. It will not stop until all measures are exhausted.

The Fed has an eye on the value of houses, buildings and cars and the numbers suggest very tame inflation. On the other hand, it would appear the bankers at the Fed have ignored the commodity markets. Last week, a majority of commodity prices (think corn) were hitting new highs, making food more expensive to produce. Please don’t be blindsided by future price increases. It may take 3 to 6 months to feel the impact, but if commodity prices remain high, corporations will be forced to pass the inflationary pressure to the consumer.

So where does all this leave us? Inflation is most painful for those who have a higher percentage of their income used on food and energy. Those prices will most likely continue to inflate as the Federal Reserve wages was with deflation. We discussed inflation and deflation as well as strategies on my radio show this weekend. You can find a replay of “Consider This with Big Joe Clark” on WQME.com or iTunes.

Joseph “Big Joe” Clark is a Certified Financial Planner and the managing partner of the Financial Enhancement Group, LLC.