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In case you were trapped in a cave away from all forms of news media on Wednesday, you’re aware that the Federal Reserve announced a new round of quantitative easing in an effort to spur economic growth by purchasing longer-term Treasury securities to keep interest rates artificially low.
Here’s a quote from the Fed:
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”
So far, the markets have responded as follows: (i) stocks are up; (ii) gold is way up; (iii) the dollar is down; and (iv) emerging markets are upset because they think the cash overflow will continue to push up their currency values, fueling concerns that asset price bubbles might be in the making in their countries.
The real takeaway from the Fed’s announcement is that it is inflation, plain and simple. Correctly defined, inflation is an increase in the monetary base, and higher prices are a result of that inflation. By creating money out of thin air to buy Treasury securities, the Fed is piling hundreds of billions of new dollars on top of an already seriously inflated base.
On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October.
So, despite what the Fed says about underlying inflation measures trending lower in recent quarters, we can see the truth in the numbers above.
The market’s assessment of the Fed’s QE II announcement – with gold prices skyrocketing to $1,380 per ounce and the dollar index approaching a one-year low as I write – appears to be spot on. Investors seem to grasp that pumping more money into the system is directly inflationary and will only serve to further destroy the value of the dollar.
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QE2 is complex, but the above helps shed light on what’s happening in our economy and with hard assets — the things we buy daily. So, my question is, “Is Commercial Real Estate Set to Inflate Too?” We will see in the coming years.
Michael Duhs, Managing Director
East West Commercial Real Estate
http://www.EastWestCommercial.com
(949) 939-8352
Serving Banks, Special Servicers, and Investors in Commercial Real Estate REO’s through its commercial brokerage and BOV / BPO services throughout southern California.
