Thursday, April 21, 2016

World's largest bond insurer economist suggests central banks should use QE to buy and monetize gold

Quantitative easing (QE) has been the primary tool, along with zero percent interest rates, for central banks to increase liquidity and to try to stimulate the economy over the past four years.  And with that money expansion they have purchased sovereign bonds, municipal bonds, mortgage bonds, and even stocks.

But the one thing they haven't bought is gold, which ironically is the most sound form of money available.

Yet as these central banks run out of assets to purchase, as seen by the incredible deflation that began to surface in nearly all assets in the middle of last year, an economist with the world's largest bond insurer has suggested that it is time for central banks to not only buy gold, but to also monetize it in their QE purchases.

In "Rumpelstiltskin at the Fed", Bassman goes down the well-trodden path of proposing Fed asset purchases as the last ditch panacea for the US economy, however instead of buying bonds, or stocks, or crude oil, Bassman has a truly original idea: "the Fed should unleash a massive Fed gold purchase program that could echo a Depression-era effort that effectively boosted the U.S. economy." 
Bassman says that the Fed should "emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce? It would be operationally simple as holders could transact directly at regional Federal offices or via authorized precious metal assayers." 
What would the outcome of such as "QE for the goldbugs" look like? His summary assessment: 
A massive Fed gold purchase program would differ from past efforts at monetary expansion. Via QE, the transmission mechanism was wholly contained within the financial system; fiat currency was used to buy fiat assets which then settled on bank balance sheets. Since QE is arcane to most people outside of Wall Street, and NIRP seems just bizarre to most non-academics, these policies have had little impact on inflationary expectations. Global consumers are more familiar with gold than the banking system, thus this avenue of monetary expansion might finally lift the anchor on inflationary expectations and their associated spending habits. 
The USD may initially weaken versus fiat currencies, but other central banks could soon buy gold as well, similar to the paths of QE and NIRP. The impactful twist of a gold purchase program is that it increases the price of a widely recognized “store of value,” a view little diminished despite the fact the U.S. relinquished the gold standard in 1971. This is a vivid contrast to the relatively invisible inflation of financial assets with its perverse side effect of widening the income gap. - Zerohedge


And just who would sell their gold to the fed when they'll be subjected to a windfall tax of 90%?

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