It is hard to believe, but it has been over 2 months since the FOMC announced its policy decision to implement QE3, or what some are calling QE Infinity. While the FOMC/ Fed is not specifically referring to it as QE3 (even that has a negative connotation now), they did say they would be buying $40 billion (net) each month, although this QE will focus on mortgage-backed securities and bailing out the banks again.
Looking at the adjusted monetary base (updated 11/15/12), there has not been much of a change since the announcement back in mid-September. I recall that QE2 started out slowly too, but the Fed did eventually deliver on its promises, even if those promises meant more disaster for the economy. I expect it to be no different this time.
We will also keep an eye on the excess reserves held by commercial banks. The excess reserves went up in tandem with the money supply during the previous QEs. So most of the new monetary inflation over the past 4 years has been parked at the banks, which parks the money with the Fed in order to earn .25% interest (almost nothing).
Even if the banks keep building up reserves, the policy of more monetary inflation will still eventually show up in prices, although not as much as would be the case if the banks were to lend the new money.
For this, I am still counting on gold and other precious metals to perform well. I am also not betting heavily against stocks, as they could benefit, at least in nominal terms, from more monetary inflation. As I mentioned recently, the stock market is a tug-of-war right now, with QE3 on one side and the so-called fiscal cliff on the other. For this, gold seems like a safer bet.
$40 billion per month in new money, created out of thin air by the Fed, will add up. We don't know how long the Fed will keep this policy, but most people suspect it will be for a year or longer.
I don't know at what point the Fed will stop inflating the money supply. My guess is that it will stop, or at least take a break, when we see the consumer price index rise above 5% for a few months in a row. If we hit a recession in 2013, then we may not see the official price index rise above this for a little while longer. A recession would likely increase the demand for dollars and would essentially counteract some of the monetary inflation.
I expect 2013 to be an interesting year. The Fed has been walking on a tightrope and I think it has been content to keep this position. Eventually, we will see a severe recession or high price inflation. It is inevitable. It is more of a question of when and how the whole thing will play out.