Forget the taper - QE can never end

The Federal Reserve's 'taper' talk was a desperate ploy to hoodwink bond investors. Bengt Saelensminde explains why.

20 September, 2013 Forget the taper - QE can never end Dear Buzzhairs Buzzhairs, Back in January I predicted that a "taper" – or a reduction in money printing by the Fed – would be one of the four lies you'd be told in 2013.  I said not to believe central bankers who said they'd stop printing. And that's exactly what's happened. Having talked about 'tapering' QE in recent months, the Fed announced this week that it planned to keep going full steam ahead. Because the story is so important for your long term wealth, I find myself coming back to it time and time again. In fact, central bank manipulation of the markets is the story of the decade. And there's a dirty little secret at the heart of the QE programme. The powers that be would really rather you didn't know about it. Today I'll explain what it is, and why it made me so confident we wouldn't see a tapering announcement this week… The Fed is stuck in a loop The mainstream media lapped up the story that the Fed would slow down its bond purchases. But had these guys read the Fed statements with an open mind, they'd have seen that shutting down the bond buying programme was always going to depend on economic indicators improving and then staying improved. As it turns out, the economic figures haven't been convincing enough. And here's the choker: the very reason the global economy isn't convincingly in recovery… is because of the taper talk! How about that! The very act of 'guiding' markets that the economy may be strong enough to consider easing off bond purchases has screwed the economy over. Thereby making sure there's no taper! In fact, the board voted 9:1 in favour of no taper. How could the media have got this so wrong? But there's another twist to the story – and it's what really convinced me that tapering wouldn't happen. The secret Downing Street plot to seize your wealth? Right now, the government are secretly plotting to plunder YOUR personal wealth. We believe savers and investors like you could be worst hit. And it could put everything you have worked hard to achieve at serious risk. Find out what's happening and what you can do – now. Click here for the full story. MoneyWeek magazine is an unregulated product published by MoneyWeek Ltd. The dirty secret In Wednesday's address Bernanke hinted that there's trouble brewing in the US government's finances. He's talking about one of the other big stories to reappear this year. I'm sure you've heard all about it before – the debt ceiling. Unlike in the UK, where the government can borrow as much as it likes, in the US there's an absolute limit on what the government can spend. That limit – the debt ceiling – has to be raised by Congress if the US government wants to keep borrowing and spending. Now, historically, the guys on Capitol Hill have always agreed to just keep increasing what is effectively the government's credit card limit. But in the post financial crisis world, the borrowing figures have just gone bananas. Now, thanks to the debt ceiling, Obama is finding it extremely difficult to ram through his budget programme. Like most politicians, Obama would rather borrow than tax. But the opposition are adamant: either reign in spending, or start raising taxes. But the thing is, there's a third alternative... A way of reducing government spending, without cutting public services, and at the same time increasing the government's income stream… The Fed's money-spinner QE is so simple, so effective... and so wildly misunderstood. The planners buy government bonds. And some curious minds know why: it's to drive up the value of the bonds, which in turn keeps interest rates on them down. Thus the government can relax, because the interest it pays on its credit card stays low. But those with even more enquiring minds will understand the more insidious trick at work here – what I call their dirty little secret. You see, the Fed doesn't just buy Treasury debt. About half of the Fed's $85bn monthly spend goes on mortgage backed securities. Of course, these things yield interest – interest which is collected by the Fed and then passed on to the government. Think about that. They print money for free, use it to buy mortgage backed securities and then skim the interest. This means that the central planners can raise money without having to tax people – and instead of borrowing money, they print it and make it work for them.  It's the perfect wheeze. And it's simply too good to taper away. In fact, I suggest that far from tapering, over the medium term we'll see more of it. £1bn City 'Insider' spills the beans! In a new 3 minute interview one elite money manager discloses where he's investing millions right now. He also reveals which three assets he's telling his rich clients to DUMP asap. Watch the short interview here. The Price Report is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600. Where to now? Now, though I've always maintained that we're on the QE to infinity path, I have to admit I'm still expecting some 'phoney tapering.' That is, at some point we may see the planners cut back a little on their bond purchases to win a little credibility. I mean, without credibility, the Fed could soon be presiding over a Zimbawean currency. But there's no doubt in my mind that the Fed has painted itself into a corner. Just look at what the faintest talk of cutting back bond purchases did. Yields on US government debt nearly doubled and the emerging markets were put on panic alert as their currencies tumbled off a cliff. And therein lies another killer unintended consequence for the Fed... In order to keep their currencies from imploding, many in emerging markets have been selling US treasuries and using the proceeds to prop up their deflated currencies. Clearly that means less demand for US treasuries. So if the Fed stops buying these bonds too, then who exactly will buy the stuff? As news of the Fed's decision not to taper hit the markets, just about everything rallied. Including commodities like crude oil. To my mind, we'll continue to see more of the same over the coming months. And after a while, these price increases will feed into the real economy… which means inflation. It's already started to show up in the gold miners. They're highly sensitive to changes in the gold price… so I'm sure they were popping champagne when they heard Bernanke's latest announcement. The NYSE Arca Gold Miners Index shot up on the news. And Simon Popple's portfolio of gold miners is looking very interesting all of a sudden. At the end of the day, you can't just magic money out of thin air so as to avoid taxation.  The truth will out in the end – and it comes out by way of inflation. All of this gives rise to the new lie: that inflation will stay low. The Fed confidently predicts 1.2% to 1.3% this year, and remaining below 2% next year. Now I know that the planners have a knack of fudging the figures… but if commodity prices continue to rise, and the dollar continues to fall, they're going to find it awfully difficult to disguise what's going on. To my mind inflation hedges are going to have a fine time of it for the foreseeable future. I'll bring you some ideas on how to play it over the coming weeks and months. Good investing, Bengt Saelensminde The Right Side PS: Got a comment on this article? Leave a comment on the MoneyWeek website, here. Don't miss out on other recent articles… How your gut is costing you money 18th September 2013 Politicians won't let this market crash 16th September 2013 A red hot trust for the brave 13th September 2013 I need to clear the air about the Co-op 9th September 2013 Important Information Metals and Miners is a regulated product issued by Fleet Street Publications Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Past performance and forecasts are not a reliable indicator of future results. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. 0207 633 3600. 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