Andy Xie On Why QE 2 Is Destined To Fail

The always insightful Andy Xie is out with a piece in China International business which discusses why Bernanke's desperate attempt to debase the dollar to increase exports will fail. He notes that the Federal Reserve is desperate to re-inflate the US economy and has resorted to currency debasement as the preferred solution. However, surplus countries (mainly Asian) will simply not allow the dollar to drop and will constantly intervene to weaken their currencies to maintain export competitiveness. In effect, these countries have check mated the US as the Fed is unable to lower the value of the dollar through QE 2. Yes, commodity prices will rise, but the nominal exchange rate will stay the same because of currency intervention by our trading partners. It is all part of the race to the bottom.  From Mr. Xie's article:
It seems that nobody wants to appreciate. Most major economies will do something to keep their currencies down. That is checkmate for the US. Without the devaluation benefit on rising exports, QE just leads to inflation, first through rising oil prices. The American people are suffering from declining housing prices and high unemployment. If the gasoline price doubles, the country may not be stable. How would the elite react? Probably more of the same.

The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis. The first sign would be a collapsing treasury market. The Fed is controlling the yield curve through its QE program. But, it is irrational for other investors to play this game. The only reason to stay in is that the Fed won't let the market fall. But, the underlying value is evaporating with rising money supply and the inflationary consequences. When all the investors realize this, they will run for the exits and the Fed won't be able to stop the stampede. If it prints enough money to take over the whole market, the people with freshly minted dollars would surely want to convert their money into other assets. The dollar would collapse too.

The world seems on course for another crisis in 2012. The same people who caused the last crisis are still in charge. They'll get us into another. Iceland is sending its former prime minister to court for causing the banking crisis. A worse fate awaits the people who are causing the next crisis.

I really like Mr.Xie's characterization of the treasury market and how it is nothing more than a ponzi scheme with everyone trying to front run the Fed. The problem arises when market participants realize that the value of the dollar is collapsing and they abandon their attempts to realize a 10% gain in treasuries to convert their proceeds into hard assets. Eventually, the value of the dollar will play a role in the Treasury market, but for the time being, no one seems concerned about the dramatic loss in the dollar's purchasing power. When the Treasury market starts to move against the Fed with rising interest rates, the US will be done once and for all. The Fed will no doubt claim to see "deflationary signals" and start to print more money to keep yields low. This will cause a flight from the dollar as market participants wake up to the fact the dollar is worthless and will be printed to infinity.

The one part of the article I disagree with is the part about the elites ever being prosecuted. The US elite are in full control of the US political economy and have little reason for concern. They just got away with one of the largest frauds in US history as evidenced through the 2008-2009 financial crisis. Have there been any prosecutions as a result? Of course not! In fact, the bankster CEOs have profited through egregious bonuses and stock options. The worst case scenario for these CEOs was a one year (2008) deferral of their multi-million dollar bonuses. In 2009-2010 they simply doubled their usual bonuses to make up for the loss in 2008. It is a good scam if you can get it. The most depressing aspect has been the weak reaction by the American public from being raped financially to the tune of trillions of dollars. The US public has shown very little interest about the criminal acts which have transpired during the financial crisis. They don't fully understand the consequences of the banksters implosion of the US economy.

Black Swan Insights


1 comment:

  1. Bernanke's speech should sound like this QE yesterday QE today QE forever.