What Happens After QE2?

The current money printing operation at the Federal Reserve is supposed to end in June. 2011. But what happens then? Does the Federal Reserve truly stop monetizing federal debt and bravely start raising interest rates, and actually selling federal debt to the public again? Peter Ferrara writes about the possible downward spiral in the government finances.

The Fed's policy today is known as QE2, meaning the second round of "quantitative easing" (printing money) under the Obama Administration. That basically involves using the printed money to buy 70% of the Federal bonds issued to finance the deficit, a classic prescription for inflation...

QE2 is scheduled to continue through June, at which time most commentators expect the Fed to end this reckless policy. But if the Fed suddenly stops this "quantitative easing," who is going to step in to buy the bonds to finance the 70% of the remaining federal deficit of $1.645 trillion for this fiscal year, and the $1.4 trillion deficit the CBO projects for the next fiscal year? Finding real buyers for those bonds is going to require paying soaring interest rates on them, which will only further increase the deficit. And that will cause soaring interest rates across the credit markets as well.

And that will mean another recession about a year later. Which would be in the middle of 2012. Which is why that is not going to happen. Which is why QE2 will be followed by QE3, QE4, and quite possibly QE5, just to make sure no recession or ominous economic clouds darken President Obama's door during his glorious 2012 re-coronation tour[.]

This is a pretty dark picture, but the question is: what to do about it?

The big question for me is what the government does when it gets to default. Broadly, it will renege on the debt, probably cutting interest rates on its long-term bonds. It's been done before. It will renege on the entitlements. I'd guess that it will fudge on Medicare and Medicaid, not by cutting benefits but by cutting payments to providers and thus causing them to cut back on Medicare services. Then the government will take over Medicare, nationalize it, demonizing the doctors to great acclaim, with glorious promises to do the right thing by seniors. But then the rationing will begin.

My big question is whether the government will actually stage asset seizures. The government in Hungary already did the equivalent of seizing peoples' 401(k) private pension accounts in exchange for a government pension. You could call it nationalizing private pensions. Then, what about gold ETFs? Suppose that the $56 billion GLD SPDR Gold ETF is up to $1 trillion in a couple of years. The Obama administration might try to do a swap in devalued dollars for gold. You don't think so? Think again. That's what the federal government did in the 1930s. The feds called in gold coins at $20.75 an ounce and then devalued the dollar to $35 per ounce.

In other words, given that the government is behind the 8-ball and will continue its money printing after the end of QE2, and at some point will have to face the music, how does an honest citizen protect himself from the thieves and the robbers from the government?