Wiedemer: More Fed Easing to Lift Stocks but Also Boost Inflation

Friday, 28 Oct 2011 02:13 PM

By Forrest Jones and Ashley Martella

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The Federal Reserve may roll out more loose monetary policies, including a third round of quantitative easing, in an effort to keep the economy officially out of recession, a move that will mean more gains for stocks — but more inflation, says Robert Wiedemer, financial commentator and best-selling author of "Aftershock."

The Fed has already carried out two rounds of quantitative easing — asset purchases from banks that pump money into the economy and send stock prices rising — and officials at the U.S. Central Bank have hinted a third round may be needed to fuel growth and ultimately, more hiring.

Side effects of such moves include rising inflation pressures, which are already on the path to getting worse, Wiedemer told Newsmax.TV in an exclusive interview.

Story continues below video.



"Will I think it will be effective? I think it will be effective in raising the stock market, absolutely. Do I think it will be effective in boosting the economy? No, not that much," said Wiedemer, managing director of Absolute Investment Management.

Maybe a little.

"If you raise the stock market, you will boost the economy by boosting people's confidence and spending."

But now for the bad news.

Despite signs that inflation rates may cool, such as dipping global commodities prices, past quantitative easing rounds have pumped enough money into the system that consumer prices and prices at the wholesale level will continue to feel pressure to climb.
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"Any time you print money you are going to get higher inflation," says Wiedemer, who recently released an updated edition of his best-selling book, "Aftershock."

"There's a lot of things that can slow the onset of inflation, but that doesn't prevent inflation. It think we are in that period where we are slowing the onset, but it's clearly still starting to come, and I think we are going to see it going over 5 percent next year."

Investors, meanwhile, need to rethink their strategies in light of what the Federal Reserve's policies have done to various asset classes.

By unleashing enormous sums of dollars into the economy, the Federal Reserve has weakened the currency.

And when the currency weakens, gold strengthens.

However, when stimulus measure stops and the excess liquidity drains out of the system, stocks can fall.

"People are going to have to be more careful in how much exposure they take to those areas, and they are also going to have to look at alternative investments, things that are a little more uncomfortable, things like gold, certainly, but also just a little more protection. We may find that if you don't want to go into more unconventional investments, you are going to have to accept some lower returns."

Reanimated recovery

The U.S officially emerged from the Great Recession in 2009, but the government can claim victory over the downturn thanks to its fiscal and monetary stimulus measures, and not to natural recovery.

While government borrowing and money-printing can act like defibrillators and jolt some life into economic indicators, at the end of the day, the economy never emerged from the downturn that began several years ago.

"We are still in the same recession we were in 2008 and 2009, but we suspended it with massive money printing and massive government borrowing. That's helping to keep our economy out of what really is a recession," Wiedemer says.

"As that stimulus goes down, we're not printing as much money right now and we're not increasing the amount of borrowing, we are naturally going to head back into a slower economy. And we can stimulate it again but we are always on the edge of going back into that 2008-2009 original recession, unless we are running that stimulus."

About Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $120 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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