Expansionary monetary policy to stimulate the economy typically involves the central bank buying short-term government bonds to lower short-term market interest. However, when short-term interest rates reach or approach zero, this method can no longer work. In 2008 the Federal Reserve started a new method called Quantitative Easing (QE). This is a large-scale creation of money used to purchase government bonds or mortgage backed securities.
From 2008 until 2013 the Federal Reserve used QE1, QE2, and QE3 and increased the Fed balance sheet from approximately $800 billion to over $4 trillion. From 2013 until 2019 the Fed has attempted to normalize interest rates by raising Fed Funds and draining off its balance sheet. However, these attempts resulted in market declines and a slow down in the economy. Federal Reserve Chairman Jerome Powell is now expected to lower Fed Funds rates in 2019 from their current rate of 2.25% to .25%.
If the next recession starts in 2020 with interest rates near zero and the Fed balance sheet at or near $4 trillion, the Fed will be forced to return to QE and print more money. With a floor of $4 trillion the Fed balance sheet could increase to $8 to $10 trillion. With the Fed talking about lowering Fed Funds and going back to QE5,6,7,8, the dollar is falling and market prices are rising.
Financial advisor Peter Schiff believes a permanent expansion of the balance sheet and the monetization of debt will result in stagflation. This is inflation without GDP growth. It also means an increase in inequality, with the rich prospering and lower income workers finding wages not keeping up with living costs. While CPI inflation is only 2% , real inflation including energy and housing is closer to 5% and rising. House speaker Nancy Pelosi, and Fed Chairman Jerome Powel both have a net worth over $100 million, they both want easy money. Smart Money is short the dollar and long gold.
