Have you ever been to a festive occasion when the hosts removed the punchbowl? Remember how the energy in the room began to subside as the revelers began heading home? Well, that may be the outcome if the Federal Reserve Bank (the Fed) decides in June to stop its manipulation of the money supply. The experiment has lasted two years and involves approximately 4% of the US money supply. $2.4 trillion were printed out of thin air and lent to banks that are members of the Federal Reserve System. It has been described as Quantitative Easing (QE). We are now coming up on the end of QE2 where the Fed bought US Treasury bonds at the rate $90 billion per month beginning last August. In some bond auctions, the Fed was the majority purchaser/lender using money it created out of thin air. This sounds a lot like Peter borrowing from Paul.
Did you know that the Fed is now the largest single owner of U.S. Treasury debt, ahead of China and Japan?
OK, so now we may have Peter stop borrowing from Paul to support our recovering economy. Two questions arise in my mind. First, what will we use to stimulate our weak economy going forward? Second, how will the Fed pay back the $2.4 trillion it borrowed from Paul ( itself, Japan, China, et. al.)?
The risks outlined in the February newsletter still exist. The stock markets around the world continue to rise. New risks like inflation are becoming more apparent, here in the U.S. and around the world. What is an investor to do?
As your advisors, we are still very cautious. We do not see a dramatic slowing in the U.S. economy on the short to medium term horizon. We do see deep structural problems for the long term. In light of this continual research and monitoring, we have recently increased stock holdings and still have 40-60% of most portfolios in very short term bonds and money market investments.
Please contact us with your questions. We look forward to seeing you or hearing from you soon.
Until Next Month,
Your Advisors at Dominion Wealth