Posted on 05/04/2011 4:22:04 PM PDT by blam
How QE2 Has Changed Everything
By Bill Bonner
April 4, 2011
05/04/11 Baltimore, Maryland – Monday was a no-action day on Wall Street. Tuesday was dead too. Except that gold dropped $16.
The killing of Osama bin Laden was supposed to raise prices. Especially the price of the dollar. The buck has been going down for 3 years. It’s now within a few cents of its all time low, registered back in the ’70s.
We were prepared to advocate more killing, maybe even mass murder, if it would lower the unemployment rate…but the ‘killing lift’ was short lived. It lasted only a few hours. Then, things returned to normal.
But normal is very strange. No matter what happens, investors take it as good news.
Investors’ sentiment is overwhelmingly bullish. Stock prices are unquestionably high. Dividend yields are low.
It is almost enough to make you think we weren’t really in a Great Correction after all. But as near as we can tell, the Great Correction continues.
So…
If we’re right, most investors are wrong.
If we’re right, stock prices will come down – hard.
If we’re right, real bond yields will go up sharply.
If we’re right, commodities are over-priced.
If we’re right, gold should correct.
But wait. There’s more.
If we’re right…the Great Correction is only part of the story. The other part is the feds’ reaction to it.
That’s why all of these Great Correction phenomena could soon give way to another phenomenon – inflation.
If we’re right, the feds are just waiting to see what happens next. They know that there’s something very wrong with their ‘recovery.’ But they don’t know what. They’re just hoping that it picks up enough steam to continue on its own, without the need for more towing.
Because they’re watching prices rise too. Bernanke says this inflation is ‘temporary.’ He’s probably right…to a point. Inflation is rising because of the feds. When the feds stop force-feeding liquidity into the system, prices should fall again.
Asked what would go up after the Fed announced its QE2 program, a shrewd analyst replied – ‘everything.’ Now, everything is up – except real estate. And now the Fed says its program of QE2 will come to an end in June.
So we ask. What will come down when QE2 ends? The answer comes as quickly as a pizza: everything.
If we’re right, the feds have not really laid the groundwork for a genuine economic recovery. Instead, they’ve pumped up government spending…and re-inflated the financial sector. This has put more money in voters’ pockets. Usually, about 12% of personal incomes come from the government’s programs – such as Social Security, unemployment comp, food-stamps and the like. Today, the figure is 18%.
In 1949, 70% of national income came from wages. Now, the figure is barely 50%…with the other 50% from finance and government giveaways. The trouble with income from speculation and government handouts is that it reflects no real increase in wealth. It is ‘funny money.’ For every speculative gain, there is a speculative loss. And for every dollar given in government payments, there is a dollar taken away somewhere else.
QE2 was the funniest kind of money. It was created – by a computer – in order to ‘pay’ Wall Street for US bonds. If we’re right, it was this funny money – combined with other comic acts, including zero interest lending and trillion-dollar deficits – that caused ‘everything’ to go up. And if we’re right, everything will go down when it is taken away.
If so, how long before QE-3.
I think the feds are trapped (Liquidity Trap?) and the least painful way out is inflation.
The old people will be hit hard though. (No COLA's.)
You got it. They have no other option except QE3. Send in Seal Team 6.
This article is ridiculous - I have never seen prices on goods and services drop.... that would be a first since the depression. It is also very counter intuitive. The Fed has devalued the dollar - raising commodity prices - they have left limited options after soaking the economy with cash.
This will be like the 70’s - watch wages go up in the tech sector, then engineers, then everyone else. Amazon, Google, and a host of others are already hiring like crazy - companies have tons of cash and are going to spend it sooner or later.
Stuff in the store will get smaller and more expensive.
I would buy stuff now because it ain’t going to get cheaper.
So the dollar is going to get stronger in July?
The US Gov is spending $6 billion a DAY that it doesn’t have.
$6 billion a DAY in deficit spending.
But because QE2 ends in June suddenly the dollar will get STRONGER?
Is the author a student at Berkeley? Does he believe that we should “tax the rich” to fix all our problems?
What a blooming idiot.
To repeat his thesis: $6 billion a day in deficit spending and the dollar will suddenly start buying MORE.
The author is a blooming idiot.
“This article is ridiculous - I have never seen prices on goods and services drop.... that would be a first since the depression.”
Yep. And what guarantee is there that we couldn’t have deflation again?
If you look at the debt picture there is no way that the recovery can take place without liquidating huge amounts of debt. That’s what happened in the 30’s and it can happen again. Debt that can’t be repaid has to be liquidated. There is a huge amount of debt that absolutely can’t and won’t be paid back. It will be ripe for liquidation.
Deflation is 1/2 of the cycle of boom and bust that takes place regularly in economies (look at history; no society has ever kept it from happening). The Fed was created to supposedly keep that from happening but all they have managed to do is make the swings of the cycle that much more extreme.
“”Does he believe that we should “tax the rich” to fix all our problems?”
Where did he say that?
AFAIK Bonner has always been against the soak-the-rich philosophy.
“But because QE2 ends in June suddenly the dollar will get STRONGER?”
Interest rates are likely to rise, which will mean higher financing costs but a higher dollar, also. Agreed, the deficit is ugly but investors haven’t lost confidence in the dollar (yet) so there is still a good possibility for the dollar to increase in value.
And QE2 is what trashed the dollar, so stopping QE2 should improve the fate of the dollar.
So the dollar was strong before QE2, was only temporarily weakened by QE2, and will go back to being strong again once QE2 is over?
That’s why I asked if the author also believed in “taxing the rich”. Because both ideas “QE2 is the sole source of dollar weakness” and “taxing the rich will fix the economy” are ideas of equal economic insight.
The US gov spends $6 billion IN THE RED, every single day. Every single day it over-spends $6 billon it doesn’t have.
Is that going to stop at the end of QE2? Will that no longer matter after QE2 is over?
Why on Earth would you worry about deflation? Deflation means that the purchasing power of the dollar is increasing. In other words, it's a good thing.
Most of us are used to that. We haven't had COLA's in three years now.
I don't know. I am a retired chip-maker but I do read.
Equals bad, right?
“So the dollar was strong before QE2, was only temporarily weakened by QE2, and will go back to being strong again once QE2 is over?”
Things are not so black-and-white as you propose. Currencies are only weak or strong in relation to other currencies.
The dollar was not extremely strong before QE2 but it was not as bad off as some other western nations, either. The Euro hasn’t done all that well the last couple of years.
I never said QE2 was the ‘sole source’ of weakness, and I don’t think the author said it, either. But a weak dollar can be strengthened and a weak dollar can become weaker. The only timely question is what will it do in the next six months to a year.
If the Fed really holds off on QE3, then the stock market will fall dramatically, and the commodities run up has been too cute by half and we are already seeing the fluff coming out of this bubble with the Fed just saying it will end with QE2. So, not really a deflationary spiral, but the artificial run up of the Stock market and gas and commodities should plummet.
This will be great for Obama.. yarrk. But, unfortunately for him, interest rates will rise perhaps quite considerably if they are really planning to attract $100 Billion per month in financing perhaps to Carter levels and this applied to a sputtering economy will be like a hammer. This is what will force talk of QE3.
However, if the Government does really cut spending in response and kills all of the crap that has been implemented to shut down the economy, EPA Regs, new Farm Safety crap that has the Amish being raided by the FBI, ObamaCare, etc. we may just pull out.
LOL... yea right.
And the $6 billion we borrow every day? No consequences to the dollar from that?
It may not be called QE-3 but there will be one, IMO.
To avoid that, they gotta keep printing. QE infinity.
“And the $6 billion we borrow every day? No consequences to the dollar from that?”
Is that the only thing that matters? Are there no other considerations to make here?
Of course it matters that we are going into debt more each day. The question is, when will it cause the system to quit functioning, i.e., crash?
So when is that point? Is it next month, next year, next decade? I’ve thought for a long time it was way past the point of sustainability but I’ve been wrong so far.
The issue is that the dollar may still have strength left for awhile, even at these rates of continuing debt. Did you see that the dollar was up significantly this past week? Apparently some large investors think it still has room to run.
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