This video by Bob Murphy is a couple weeks old, but makes a very significant point about the purposes and intentions behind QE3. Murphy provides a brief history of what the Fed has tried to do during the recession, and sketches out their plans for the future, but he seems to stop just short of describing exactly what this might mean, particularly in regards to gold and precious metals.
After the housing bubble collapsed, aggregate demand fell as consumers stopped spending and wanted to save their money. Time preference fell as uncertainty caused the average American to increase their net cash holdings. Obviously, this is completely unacceptable to the Keynesians who run both political parties and our national banking system. To them, consumption spending must remain as high as possible at all times for an economy to be considered healthy. So, in an effort to convince us all to stop being paranoid and actually saving our money, they dropped interest rates to near zero. The thinking behind this is that if you eliminate the return from savings, people will stop saving, and spend their money on consumption instead.
Of course, the overlords were wrong. The recession had freaked people out and undermined confidence to such a large degree that people kept saving. They kept their money in a 0.3% APY savings account or a 0.5% CD, not because they were salivating over the interest they would gain, but because they were uncertain about the future. They were worried that they might lose their job, or have their hours cut, or that friends and family might need their assistance. They saved, not as a means of generating extra income, but to protect themselves from an uncertain future.
So now what do you do if you’re Ben Bernanke? You used your hammer of lowering interest rates as much as you could, and it had no effect. Those stupid consumers still refuse to spend. But perhaps, by flooding the market with even more money, and announcing that you plan on doing so indefinitely, you can freak them out. Perhaps you can convince them that high inflation is on the way. If you can successfully convince people that not only will their meager savings account not make them any money, but that they will actually lose money as the purchasing power of the dollar falls, then they have to spend their money, don’t they? The stated goal is to make savings as unappealing as possible, so that consumption rises.
To a certain extent this may work, but the Fed commits an egregious error when it ignores the prospect of an alternative: precious metals. After all, the Fed only has the power to devalue the dollar. Even if it could get all central banks around the world to devalue their currencies as well, this still only affects fiat money. Assuming the average consumer still has a great deal of uncertainty about their economic future and a strong urge to save their money, these consumers may be pushed, not out of the dollar and into consumption as Bernanke hopes, but out of the dollar and into precious metals.
The mainstream media has been fervently anti-gold for, well, basically ever. They’ve proclaimed that it belongs in the category of tin-foil hats and iodine pills, an unnecessary distraction only considered by crazy people. They’ve decried its volatility, and claimed it is the next bubble waiting to burst. But those who have studied Austrian Economics firmly understand that the main objection to gold by the central planners is that they cannot control it. They cannot manipulate it, and this is why its appeal to the average American is growing every day.
Even economic illiterates are largely aware that an argument for owning gold exists. If nothing else, they know that Glenn Beck thinks they should buy it because it protects against inflation and is a tangible store of value that you can hold in your hand. They might not be familiar with the history of the gold standard, of the specific details behind quantitative easing, or any advanced monetary theory. But they don’t have to be. To be pushed into gold, all that will be required is for someone to desire to save (already exists) and to be afraid of leaving their money in dollars (the Fed’s new stated goal). Once this happens, I expect a whole new wave of Americans who have up until now sat on the sidelines and abstained from entering the precious metals market to give it increased thought due to rising inflationary pressures. So long as the economy remains sluggish and the purchasing power of the dollar remains suspect, precious metals will transform from being the obsession of a few paranoid cranks to a widespread and socially accepted form of protection and security.
So, in a very strictly limited sense, Bernanke and Krugman are right. QE3 will raise demand. It will raise the demand for gold and silver.
NOTE: I am not even close to being any kind of professional financial advisor. I have no degree in Economics. If you are considering buying gold, please get some advice from someone with a lot more expertise than I. Peter Schiff would be a good place to start.