The Federal Reserve announced QE3 (the third round of so-called quantitative easing) back on September 13, 2012. While it didn’t specifically call it QE, it did say that it would buy $40 billion per month in mortgage-backed securities.
Then, three months later on December 12, 2012, it was announced that it would continue with its purchase of mortgage-backed securities and that it would also buy $45 billion per month in long-term government debt. This was a net figure. It was buying long-term treasuries before, but it was also selling shorter-term debt to offset it.
So with the announcement in December, the adjusted monetary base should be going up at about $85 billion per month. It should have gone up by about $40 billion per month in October, November, and December.
The problem is that the charts released for the monetary base have shown no such thing. The latest chart updated through 1/10/2013 finally shows a big increase in the last couple of weeks. But this has just gotten the monetary base back up to about where it was at the end of July. It has not yet had the dramatic increase that we should have seen.
I don’t know if the Fed is lying or not. So far, the charts don’t match the rhetoric. I expect that to change. But regardless, it is important to realize that the only major economic impact that QE3 has had so far is due to the actual announcement. We haven’t actually seen the massive monetary inflation yet. In fact, as you can see from the chart, the monetary base is lower now than it was for a short time back in February, which was almost a year ago.
For this reason, I am not ready to short bonds. If you are going to short the stock market, it should be very little and it should be more than offset with long positions in gold and gold investments.
And despite gold’s bad performance in the last month or so, I would not count on that trend to hold. While a new deep recession is still possible, I don’t see it nearly as likely if the Fed actually follows through with what it has said. $85 billion per month in new money is a big amount. That can paper over some problems for a while, at least until we start to see higher price inflation.
We will continue to track the adjusted monetary base, along with the excess reserves held by banks. If the monetary base starts going up at $85 billion per month as promised, then I don’t see any kind of a deep recession happening in 2013. It will be a time to put more of your investments into hard assets, in preparation for higher price inflation and higher asset prices.