Usually H Dent’s emails come with a do not distribute\/copyright notification… this one doesn’t have one and has a distribution email address attached so I feel OK about posting it… It seems to confirm my thoughts below…..<\/p>\n
QE2 To The Rescue – Keeping Assets Afloat <\/b>
\nPosted: 05 Oct 2010 10:47 AM PDT
\nThe Federal Reserve announced at its most recent meeting that it stands ready to unleash even more money (money printed out of thin air, thereby called Quantitative Easing) in the bond market if the economy slows. This sets up yet another bizzaro universe scenario where any and all news only drives the equity markets, commodities, and precious metals higher, as good news is seen as, well, good, and bad news is seen as further reason for the Fed to act.
\nSo far, the Fed has used the funds rolling in off of its mortgage portfolio to buy treasury bonds, which keeps treasury prices high and yields low, thereby affecting all assets (like mortgages) priced off of treasury yields, and also keeps liquidity flowing. As long as new liquidity flows into the market, there is the continued devaluation of all dollars already in the system, thereby leading to the increased prices for metals, other commodities, and equities.
\nMake no mistake, the Federal Reserve is redrawing the economic pie when it prints new dollars. Their share gets bigger, all outstanding dollars get smaller. Every single dollar in your pocket is worth less.
\nSo what\u2019s the goal? What could possibly be of such importance that it makes theft by the government an appropriate course of action? Your well being, of course.
\nThe government has clearly outlined a strategy that is intended to save all of us from\u2026pain. Financial pain, to be more precise. To save us from falling home values, equity values, incomes, etc., the government has embarked on a massive program to prop up all valuations. But the government cannot do this on its own, as it has no funds. In order to do this the government must get the economic horsepower from somewhere. The US government in the form of the Treasury Dept could borrow the money, but that would require messy Congressional approval for a number that is over 3 times the size of the stimulus package. Instead, the Treasury relies on the Federal Reserve to do the heavy lifting, purchasing $1.7 trillion in assets so far, with another round of purchases estimated to by right around the corner. If the new round fo QE comes in at the estimated $500 billion , then a full $2.2 trillion will have been printed out of thin air to prop up the rickety assets in the US.
\nWhere does the economic force behind these new dollars come from? From savers, of course. Every one who has a US greenback to their name pays the price. Each dollar gets nicked, so the more dollars you have, the more you get nicked.
\nWe are in the midst of what could become the greatest forced wealth transfer in the history of the US.
\nWhat happens when it doesn\u2019t work? What happens when the Fed has printed $2 trillion plus and the jobs market does not pick up? Companies don\u2019t rush out to advertise in the help wanted section? Individuals don\u2019t charge up their credit cards or take on new loans?
\nWe are already here. The Fed has spent approximately $1.7 trillion, and that\u2019s on top of the US government\u2019s $700-800 billion stimulus, and unemployment is still hanging right about 10%. Credit outstanding in the US is still falling. The overwhelming weight of deflation is still pressing on the markets.
\nAt some point, this disconnect between the Fed\u2019s stated goals and the reality of the economy will have to be recognized. Then the pain that the Fed was trying to avoid will descend on us anyway. Except, we will have squandered some of our purchasing power ahead of time, making the situation even worse than it would have been. Ends<\/p>\n