Fed is Right Not to Launch Quantitative Easing Part III

The markets reacted the wrong way yesterday by pulling back when the minutes from the last Federal Reserve meeting were released this week. The minutes indicated that the Fed was not planning on launching a third round of quantitative easing (QE3). In my view, the Fed has overindulged with quantitative easing in the past and investors should be pleased that the use of non-market forces to stimulate the economy does not appear to be on the horizon.

Earlier this week, I was in Las Vegas for the Association of Private Enterprise Education (APEE) meetings (where free-market academic economists meet). I presented two papers and talked to Tyler Cowen, a New York Times columnist, as well as other free-market advocates. The gathering is a reminder that the value of free markets is appreciated and recognized by many bright people. I just wish politicians would pay attention and favor such policies, rather than pursue reckless, deficit-spending. It is mind-bobbling that that United States now is racking up annual deficits of $1 trillion with no end in sight.

I also have some good news to share about my bestseller, “The Making of Modern Economics.” The book, now in its second edition, won recognition from the Ayn Rand Institute, which published its first “top ten must-read books in economics,” . “The Making of Modern Economics” was ranked second, right behind Henry Hazlitt’s classic “Economics in One Lesson.” I’m not complaining, since Steve Mariotti, president of the Network for Teaching Entrepreneurship (NFTE), recently wrote that “Mark Skousen is the Henry Hazlitt of our time who can explain complex issues in a clear way.” My book tells the bold story of economics, with free-market economist Adam Smith as the heroic figure who comes under attack by the Marxists, socialists and Keynesians, but triumphs in the end with the help of the Austrians, Chicagoans, and supply-siders. It recently won the Choice Book Award for Outstanding Academic Title, and is highly popular among students and intelligent laymen who love a good story with lots of anecdotes and pictures. As John Mackey, CEO of Whole Foods Market, says, “I’ve read Mark’s book three times. It’s fun to read on every page.”

It is available on Amazon, including an audio version, but you can get the book cheaper by calling Eagle Publishing at 1-800/211-7661. The price is only $49.95 for hardback (code ECONH3), $29.95 for paperback (ECONP3), plus $5 for shipping and handling ($10 if outside of the United States).

Be sure to read my feature “You Blew It!” I’ll plan to have a new one for you every week. The purpose is to point out a bad decision, a foolish action or an ill-fated statement by a public official, business leader or investment guru. I have used the phrase within my family for years and they once printed t-shirts for a reunion with those exact words on each one. They learned to take my constructive criticism with a sense of humor and I hope you do, too. My intent is not to ridicule anyone but to point out a mistake that could be corrected, much as advice from a trainer or a coach can turn a faltering athlete into a world champion.

“You Blew It!” — Gold Hits $5,000 This Year?

According to a recent survey, 151 gold bugs are predicting that gold will hit $5,000 sometime this year, and go as high as $10,000 by 2015. The list of super gold bulls includes Don and his son David McAlvany, Doug Casey, Porter Stansberry, Bill Bonner, Marc Faber, Stephen Leeb, the Aden Sisters, Peter Schiff, Eric Sprott, Jim Sinclair, Bob Chapman, and Harry Schultz.

They expect a parabolic blow out caused by runaway inflation, global instability and financial crisis in the near future.

The list does not include me or Alexander Green, investment director of the Oxford Club. For the past several months, both Alex and I have argued that the precious metals market appears to have topped out – with gold peaking at around $1,900 and silver hitting a ceiling at $50 an ounce — due to two major factors.

First, the global financial crisis has been temporarily discounted. The bailouts in Europe and the United States have postponed the collapse of Western civilization. The battle between the deflation of free markets and the inflation of governments has been decided once again in favor of government. How long this inflationary trend can last is anyone’s guess. But once again, we seem to have muddled through. Gold bugs have consistently underestimated the ability of the interventionists to postpone Armageddon.

Second, technically and psychologically the gold market appeared tired. After years of bombarding TV and radio with ads to buy gold, the demand for gold appears to be peaking. Central banks have bought a ton of gold — will they keep buying more? The technical trend points to a classic A – B – C pattern, where the C point is below the A peak, suggesting the end of the bull market in this cycle.

If economies in the United States and throughout the world continue to grow, interest rates rise, and the dollar rallies, gold, silver, oil and other commodities could fall further. It’s time for the stock market to shine as the precious metals fade.

We still are not out of danger, however. The Fed may panic again sometime and pump more money into the system (the money supply is still growing), which means more inflation down the road.

Mark Skousen, Ph.D 

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