The economy is in rough shape and more people are starting to see that.  The unemployment numbers got worse this week and there were a couple of big drops in the stock market this past week.  Now that QE2 will be finishing up at the end of this month, some are already suggesting that we should prepare for QE3.

Quantitative easing is the new politically correct term for monetary inflation.  QE1 started with the fall of 2008.  QE2 and its eight month run is almost up.  Between QE1 and QE2, the adjusted monetary base has approximately tripled.  This is unprecedented in modern American history.

The Federal Reserve obviously sees major trouble ahead.  Otherwise, I can’t see the point of QE2 (from their standpoint).  The Fed has created all of this new money out of thin air, yet most of it has gone into the banks as excess reserves.  This has helped keep a lid on price inflation.

The bottom line is that I see a good possibility for QE3.  It may not happen immediately after QE2 ends, but even that is hard to say.  It may also be less dramatic than QE2, but eventually a straw will break the camel’s back of inflation.

It is very hard to predict what will happen to the economy and your investments in the near future.  It is all dependent upon the Fed’s decision on what to do.  If the market doesn’t expect a QE3 right away, we could see a lot more down days for the stock market.  We could see the dollar strengthen in the short run which would be bad for precious metals.  On the other hand, if the Fed announces QE3 coming up, then we could see a huge boom in gold and silver.  It is harder to say with the stock market, but it could certainly resume its path higher with more monetary inflation.

I am an advocate of putting at least half of your investments in a permanent portfolio setup as described in Harry Browne’s book Fail Safe Investing.  You should put an even higher percentage if you are risk averse.  For speculative purposes, I would put your extra money into cash and gold.  You might even consider a small short position in the stock market or else you could lighten up your stock portion of the permanent portfolio by just a little bit.

I expect that we will eventually get more monetary inflation and gold, silver, and oil will continue to do well in the longer run.  But you should expect a roller coaster ride with a lot of ups and downs.  There may come a day when you will want to sell some of your gold and silver holdings.  We are not even close to that day yet.  It is likely several years away.  That will be the day that the Fed refuses to create any more new money and the federal government is forced to cut spending.  This will cause a Rollback in government and it will also cause a depression.