As the Fed swiftly acts to save the US economy, one financial expert predicts that inflation will a necessary component. Find out what this would mean for gold.
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| Photo by Flickr.com | CC BY | Photoshopped |
According to Forbes
contributor Bob Haber, the U.S. has wholly embraced Modern Monetary Theory (MMT), a concept that
makes many an economist recoil. In its most basic definition, MMT is an
amplified version of quantitative easing (QE) that essentially allows central
banks to print as much money as they please and ostensibly offset the resulting
inflation through taxing the wealthy.
While zero or negative
interest rates and QE were already present around the world before the
coronavirus, Haber notes that those loose monetary policies will soon seem
moderate. He acknowledges that the Fed needs some tools to battle the unraveling
recession, yet as the hyperinflated economies of Venezuela and the Weimar Republic
show, uncontrolled money printing only moves in one direction.
In essence, inflation
is the only way out of the existing economic woes that have combined with the
latest blow to create a uniquely difficult situation. Ahead of the pandemic,
the U.S. was already dealing with $23 trillion of debt and over $1 trillion of
fiscal deficit, two issues that many considered unsolvable. Now, Haber expects
the debt bubble to climb to $30 trillion by the end of 2020, paired with the
likelihood of increased federal spending to stimulate the economy. To add,
there is also an ongoing pension crisis that will hardly change for the better with
recent developments.
To Haber, there is
only one path for the Fed, and it is a clear one. The central bank has already
printed $1.4 trillion over the past two weeks, with the Bank of America equating
this to $1 million printed every minute. Evercore ISI estimates that the Fed's
$5.7 trillion balance sheet, one that the bank was looking to reduce not too
long ago, could double by July. If it does, it will represent 50% of the
national GDP, a baffling contrast to the 5% it represented in 2008. As Haber
notes, the only remedy for this is to wholeheartedly embrace inflation in order
to make $1 trillion seem closer to $100 billion.
Just as the Fed has a
single path of action ahead, so do investors looking to respond to the paradigm
shift that has arrived. The average investor who previously held a gold
allocation between 5% and 10% will need to reassess the landscape and consider
increasing said allocation to 15%-20% as the money supply expands.
As Haber points out,
investors haven't been waiting around for inflation to take its toll and have
already jumped on the gold wagon to protect their wealth. When gold prices peaked
in 2012 around $1,900, large funds held 82.5 million ounces of gold. Now,
Bloomberg data shows that fund holdings have already climbed to 91.2 million
ounces. Aside from commercial investors going long gold across the board, Haber
also points out that mining companies have warned that the production of the
metal has essentially peaked. Haber firmly believes that gold is not only
primed to soar past its all-time highs, but also keep moving up so long as the
Fed sticks to its ultra-loose policy.
