Federal Reserve Announces QE "Lite"

  Hat tip Nomura Securities who predicted this development 2 weeks ago. The Federal Reserve announced today that:
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.
   This is an important turn of events because it means that QE (money printing) is likely permanent and the Fed is intent on monetizing debt contrary to what they say. I don't care what anyone says this action will eventually lead to high inflation. It also shows how duplicitous and deceitful the Federal Reserve really is. For the last 14 months or so they have argued that their actions were only to stimulate the economy by injecting money temporarily. When the economy showed sings of stabilization they would reduce the balance sheet accordingly. But today's actions show otherwise. Its interesting because QE 1 has largely failed as the real economy shows little signs of progress and is currently at risk of a double dip without more government stimulus.

   So far the market seems to be liking the statement (even though it was largely expected) with the market recovering most of its earlier losses. Gold is up naturally, but of note is copper and oil which are both trading down. All QE and QE "lite" will do is ensure high commodity prices during an economic depression. You can thank Ben Bernanke for paying $3.70 a gallon for gas. Its at times like these that you really understand how worthless fiat paper money really is.

I leave you with a germane quote from "Dying of Money" by Parsson which describes how people suddenly lose confidene in a currency:
Holders of money wealth express their revolt by the simple act of getting rid of their money and money wealth and declining to hold it in the future any longer than necessary to get rid of it. They do not fly flags or demonstrate in the streets to express their revolt; they simply get rid of their money. When a sufficient inflationary potential has been laid up by the government in all the available reservoirs, that is all that is necessary. If the simple desertion of the money becomes widespread or universal, the latent inflation surfaces in the form of disaster. The duller the holders of money wealth are, the longer the government can go on storing up inflation but, by the same token, the more cataclysmic must the eventual dam burst be. The Germans were among the dullest and most disciplined of all holders of money wealth, and this alone permitted the government to build up so huge a pool of unrealized inflation before the burst.
The desertion of the money holders has many of the aspects of a panic, like any desertion in the thick of a struggle. All may be orderly in one moment and in full flight in the next. As slow and imperceptible as the inflationary economics were, the economics of disaster are sudden and unexpected. A filling of reservoirs which may have taken years may be emptied in a day.
Black Swan Insights


1 comment: