Get Ready for QE Forever

Peter Schiff has been one of the few voices of reason warning that the Federal Reserve is going to re-start its quantitative easing by mid-2015, as well as keep interest rates at zero until there is a currency crisis. With the recent market turmoil, economists around the world are beginning to realize that Peter is right – more QE is needed. Even St. Louis Federal Reserve Bank President James Bullard says that another round of quantitative easing might be in order. In an interview on Bloomberg, Bullard said:

I think you should quit numbering the QEs. I’ve been an advocate of having an open-ended program. I do think QE is our most powerful tool when the policy rate is at zero. I think it is far more powerful than forward guidance, for instance. And I think we saw that during the taper tantrum of 2013. Therefore, I’ve been for having an open-ended program that reacts to economic data.”

That’s right – Bullard thinks that quantitative easing should remain a permanent tool that the Fed can turn on and off as it wills. Of course, Bullard’s argument is that the continued QE would be necessary to keep inflation high. This is the standard narrative of central bankers and governments around the world.

Peter Schiff debunks the idea that inflation is necessary for a strong economy in his latest commentary from Euro Pacific Capital. Inflation, Peter argues, allows governments to manage their irresponsible debt loads, but does nothing to help the fundamental economy.

To give cover to this tendency, economists have come up with the bizarre concept that falling, or even stable, prices squelch demand and deter consumption. The idea is that if consumers know that something will cost less in the future (even if it’s just 2% less) they will defer their purchases indefinitely, perhaps waiting for the cost of their desired product or service to approach zero. They argue that this can push an economy into a deflationary spiral of falling prices and diminished demand which may be impossible to escape

But this idea ignores the time value of a product or service (people will tend to pay more for something they can enjoy sooner rather than later) and the economic law that shows how demand goes up as the price falls. But common sense has absolutely nothing to do with the current practice of economics. Instead, the dominant argument is that inflation is needed to seed the economy with demand.

However, this argument is merely a smoke screen. The only thing that inflation can do is to help governments spend. Economies do just fine with low inflation. In fact during the late 19th century, in the Great Sag, the United States experienced sustained deflation while creating much faster economic growth than we have seen in the last few generations. As recently as during the early 1960s the U.S. experienced consistently low inflation (barely 2%) and strong economic growth based on government figures. But in their call for more inflation, modern economists tend to forget or downplay those periods.”

Ambrose Evans-Pritchard is also calling attention to this issue in his articles for The Telegraph. On Monday, he pointed out the same reality that Peter wrote about – inflation only helps bloated governments manage their debt. A few days later, he published an article entitled, “World economy so damaged it may need permanent QE”. Even the mainstream media is waking up to the problems created by central bank manipulation, and it won’t be long before speculative investors return to the safe-have of precious metals, which are the best hedges against inflation. We recommend beating the rush and buying gold and silver while they’re still cheap.

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