Deadline June 30th: End of Quantitative Easing?

To combat virulent recession, the Fed started Quantitative Easing in November-2008, by buying-out “toxic assets” and circulating money into the economy. The QE is an ad-hoc monetary policy used to stimulate the national economy when conventional monetary policy has become ineffective. Central banks utilize QE by purchasing financial assets from banks and other private sector businesses with new money that it creates electronically. This action increases excess reserves of the banks and also raises the prices of financial assets bought, which lowers their yield (price up, yield down). The whole process aims at reigning in lower interest rate regime, making it cheaper for businesses to raise capital. It is also an inflationary tool and can be used to ensure that inflation does not fall below target, thereby boosting economic activities.

At some point, cash emerge from bank reserves and flow faster into a larger economy. Private sector money would change hands more rapidly. The expectation is that hiring would rise; banks would lend; loans would be cheap and lots of people would buy houses.

After QE1 (starting from Nov-2008) added $1.75 trillion to federal debt with little positive impact, the Fed might have chosen to abandon quantitative easing. But in November-2010, the Fed again began injecting another $600 billion into the economy- this time QE2.

Almost closing the deadline June 30^th, the QE2 involves buying up long-term treasuries in order to depress long-term interest rates. The tactic could stimulate lending as mentioned above, but will boost inflation, which, due to the Fed’s money injections, is already poised to continue climbing. At the least, it is evident the desired results are far from visible. Ironically, it was also endorsed by the Fed Chief in a way, when Mr. Bernake admitted publicly last week that: “ Maybe some of the headwinds that are concerning us, like the weakness in the financial sector, problems in the housing sector-some may be stronger and more persistent than we thought.”

When the deadline comes to a close on Thursday June the 30^th, what might happen to the already depressing economic scenario? To bolster hope over economic recovery, may be plethora of QEs (QE3, QE4….) will continue to inject billions/trillions into the thin air. Meanwhile, the economy will continue to be in the doldrums. This shakiness was evident, as the U.S. stock market started to nosedive, at one point sending the DOW more than 200 points. Stocks continued to slide-the market finishing down for the seventh week out of the last eight. There is a potential of an ensuing market collapse. Correspondingly, we might expect a strong push in gold and silver prices, taking them to new heights.