Goldman: The Fed Needs To Print $4 Trillion In New Money

With just over a week left to the QE2 announcement, discussion over the amount, implications and effectiveness of QE2 are almost as prevalent (and moot) as those over the imminent collapse of the MBS system. Although whereas the latter is exclusively the provenance of legal interpretation of various contractual terms, and as such most who opine either way will soon be proven wrong to quite wrong, as in America contracts no longer are enforced (did nobody learn anything from the GM/Chrysler fiasco for pete's sake), when it comes to printing money the ultimate outcome will certainly have an impact. And the more the printing, the better. One of the amusing debates on the topic has been how much debt will the Fed print. Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps). In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. And here we were thinking the economy is in shambles. Incidentally, $4 trillion in crisp new dollar bills (stores in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil...

 

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Gold Will Explode Higher as the U.S. Dollar Bubble Bursts  

Gold Will Soar as the U.S. Dollar Bubble Bursts 

I haven’t taken the time to write about gold in length as of late because quite frankly there is so much quality stuff being written about it at this point. In addition, the understanding of the monetary system and the dangers of fiat money in general is so much better than it was even a year ago. Nevertheless, while the understanding is considerably better it remains poor. While it has become a bit cliché, the statement that “gold is not going up but the dollar is going down” is the most important concept for every investor and indeed citizen to understand at this point.

Completely wrapping one’s head around this concept may very well be the difference between economic survival and complete destruction in the years ahead. For when you truly comprehend this notion you stop thinking about gold in terms of its price and you can then make a rational decision about where it is going. Gold is not up 23% this year to $1,345/oz, rather the U.S. dollar has depreciated by 23% versus the world’s neutral money supply, gold.

As we all know by now, there is no limit to the amount of money Banana Ben Bernanke can or will print. Thus, gold’s theoretical upside is infinite in a purely paper money world. Once you understand this, you recognize that gold is not the bubble but rather the biggest bubble on planet earth today is the U.S. dollar itself.

The Dollar Bubble Grows as FX Reserves Surge Globally
French enlightenment giant Voltaire said back in the 18^th century that “paper money eventually returns to its intrinsic value – zero.” Indeed, this is the basic economic history of the world and not really such a profound statement, yet most people in the United States today have no idea what sort of immovable force they are fighting against by storing a their “wealth” in increasingly worthless pieces of paper backed by nothing that we call U.S. dollars.

One of the most bullish factors behind the current gold bull market and one that will drive the price multiples beyond where it stands today receives much too little attention. While a lot of attention is placed on the low percent of FX reserves that are held in gold by the BRIC nations and other fast growing emerging economies what is not discussed is that rate at which these FX reserves are growing in the first place. While the fact that China’s FX reserves soared to $2.65 trillion as of the end of September made plenty of headlines, not enough people pointed out the fact that this represents a 17% year-over-year growth rate. The implications of this are clear.

Everyone knows that the BRIC nations and many others own a woefully inadequate amount of gold in tonnage terms, but especially with respect to a percentage of total FX reserves. While the latest Chinese gold data is only from April 2009 and the amounts are surely considerably higher, this is beside the point I am trying to make. The key point is that if it’s FX reserves are growing at 17% then China has to increase its gold reserves by that amount just to keep the % FLAT. Forget about increasing it. It’s not just China though. It is the whole world. Russia’s FX data recently came out and guess what? FX reserves soared 19% year-over-year to $503 billion.

Russia provides more up to date data on its gold reserves and they are actually up 27% year-over-year. Nevertheless, Russia has previously stated that it wants it share of gold to reserves to get to10%. Despite the tremendous buying the percentage has only been moving up slowly and currently stands at 6%. This is a function of the dollar bubble and the impact it has had on Russia’s FX reserves...

Full article:
http://maxkeiser.com/2010/10/21/guest-post-gold-will-explode-higher-as-the-u-s-dollar-bubble-bursts/

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Quote of the day...
"Most citizens are older people, children, and handicapped. They are more likely to be refugees than combatants. If you expect the government to save you, you'll probably be dead in no time."
Alan B