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To QE3 or Not to QE3 and Does it Matter?
There has been a lot of talk about whether the Fed will discontinue Quantitative Easing (QE) and let the economy stand (or fall) on its own legs this summer. As we explore this question, it’s important to keep in mind the Fed will continue reinvesting principal payments from mortgage-backed securities and maturing Treasury holdings to keep the Fed’s balance sheet in excess of $2.5T. Before the 2008 crisis, the Federal Reserve maintained a portfolio of between $700 billion and $800 billion of Treasury securities—an amount largely determined by the volume of dollar currency that was in circulation. The increased size of the Fed’s balance sheet is an attempt to support the ever-growing debt held within both the public and private sectors. If you understand this in the context of the bigger picture, it will help you anticipate future Fed actions.
Sustaining our debt based currency requires constant and increasingly higher rates of credit creation. Factors converging right now are the enormous levels of debt in the system, a tapped-out consumer, loss of productive capacity (outsourced manufacturing), and the inability to grow exponentially due to resource scarcity.Cheap energy (oil) that provided the necessary growth over the past century is now becoming more expensive. We are getting less net energy at the same time we need to be increasing energy returns. The Mid-East crisis is only adding to the costs of energy while Japan’s disaster will add Treasury selling at a time we are in dire need of new buyers.
Although I have stated and continue to believe the Fed will resume QE in some fashion, we need to understand the consequences of no further QE to best prepare and protect ourselves for various possibilities.
Can the Economy Survive without QE?
The main reason the US economy cannot survive without life-support (QE) is that there is no ability to close the gap between available public resources and government spending. Nor is there the political or public will to push forward structural reforms in social welfare 
or unfunded liabilities, such as Social Security and Medicare. US debt has grown rapidly since the early 1980s when the US had under $1T in national debt. Today the US national debt stands at $14.3T, with annual deficits exceeding $1.5T. This is a pyramid/ponzi scheme that has only one ending, collapse. Following the 2008 insolvency crisis, millions of US citizens were left without a job and are now living on government handouts. Social welfare benefits increased by $514 billion over the last two years (TrimTabs) and now account for 35% of wages and salaries. Over 43 million Americans rely on Food Stamps to purchase groceries and we haven’t even gotten to the increasing population reliant on Social Security. All of this is occurring at the same time prices are rising for all necessities. Any cuts in social welfare or unfunded liabilities will result in massive discontent, populous uprising, and the eventual breakdown of the current system. Hunger is a great motivator.
Effects of Deflation
At this stage in a highly leveraged debt-based monetary system, deflation would result in massive defaults. Money (credit) would shrink, while prices, employment, borrowing, and tax revenues would fall. The US is already unable to meet funding requirements (as noted by the $1.5T deficit). Falling growth and declining tax revenue will only exacerbate the deficits, leading to a sovereign default.
Point of No Return
Beyond the social impact, if the Fed stops creating money to support the insolvency crisis (i.e., printing money to fill the funding gap), the sovereign bond market and western banking system will implode. The western (global) banking system is based on the continued functionality of its sovereign bonds markets, the underpinning of the monetary system. A major sovereign default will result in loss of international finance and loans. Borrowing costs in the form of higher interest rates will increase dramatically destroying derivative markets and the underlying currency.
Sovereign Debt Restructuring
There are many examples of sovereign defaults to explore that help explain how defaults impact borrowing costs and currency. One recent example is Russia’s 1998 default of $72B. Following the default, Russia’s entire banking system fell into chaos with many banks being closed, while others were taken over by the government. The ruble fell about 70% against the US dollar from August 1998 to July 1999 (84% consumer inflation rate in 1998). From 1992 to 2000, Russia’s annual inflation rate was 38%. Eventually Russia’s debts were restructured. Another example is the Argentinean default of $132B in 2001. Leading up to the default, Argentina suffered through hyperinflation – prices rose 5,000% in 1989. As with Russia, the Argentine debt was restructured.
Restructuring is not easy and often does not resolve the problems. For example, sovereign defaults: 1) must be consensual; 2) they pose risk of moral hazard; and 3) they require funding by increased taxation. Another problem is the introduction of hedge funds that hold distressed sovereign debt. The debt holders may sue for full payment, even after a restructuring has been arranged. Elliot Associates exemplified this when they purchased $20M of commercial loans guaranteed by Peru after they announced a Brady Bond restructuring. Elliot Associates sued for full payment and eventually won the case for $58M, which Peru paid in 2000.
Hold Your Gold
Much of the public and gold investors alike, are uninformed about the consequences of discontinuing QE and a subsequent sovereign debt default. What we are experiencing today is a global insolvency that has no possible outcome other than a devaluation and/or restructuring of western debt. Left with the choice of debt default through restructuring or monetization, the Fed will choose to delay as long as possible. Delaying the inevitable requires printing money and negative real interest rates to sustain debt financing. Entitlements will have to be cut at some point, taxes will increase, and public assets will be privatized. Unfortunately dragging this out leaves the poor and uninformed in the most vulnerable position. Given the astronomical levels of global debt, hyperinflation will occur if we don’t restructure, which is why you should hold physical gold. And if the Fed does decide to default, you should hold physical gold – currency devaluation, fraud, and corruption coincide with sovereign debt default.
Since this is a mental exercise in looking at the end of QE, I’ll touch on timing and sequence of events. The US may be able to keep bond markets functioning in the short-term following cessation of QE. This will result in falling GDP, a liquidity crunch, and temporarily rising US dollar. Timing depends on the willingness of foreign creditors and other external factors, but I do not expect US bond markets will be able to attract the necessary funding beyond 2012, without additional credit creation. If the US is able to prolong the collapse during this period, annual deficits will continue to grow, forcing the
US Govt. to introduce new and fancy ways of hiding the growing debt. At that point the US will need to make a choice between default and resuming monetization of debt. In either case, the US dollar will fall and gold will rise. Just as both paths lead to higher gold prices, they eventually connect with a new monetary system. Nothing short of an asset backed currency will be accepted following the catastrophic collapse of the western (world’s) banking and monetary system that awaits.
~David Freedom
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how old are the geo's?
who certified the geo's?
where is the bond? for the geo's?
its all about the geo's... until its about you digging in the middle of a lake community driving your mining trucks thru the center of town and the wear and tear you will cause with heavy loads in the winter when the roads are at their weakest!
so.. Geo's.. and then.. is it really possible to get a permit to work the mine and at what cost?
next question is how much does it cost to get the mine up and running... take the average that 3 bonded Contractors give you.. multiply it times 3, 3 fuck face! not 2!
then you can figure out what it will cost to get it out of the gound, multiply times 3, 3 fuck face!!!
are you making money at $1500 an oz?
What about not mining it? If the geos are good there is an imputed value based on reserves, That value should go up with the price of gold. 600,000 in reserve value is like having 400 oz of gold but no storage costs, purchased with 10-20% down at 5% and paid off in hyper-inflated dollars. Living on the property for two years may change the tax on the gold appreciation. Is that thinking off base? The mine is small so the impact would be small but that may not matter, this is California so what's reality got to do with it. My multiplying rule is usually double then redouble so your 3X is generous. Thanks for the input.
QE3 will happen, but not yet. There is no way the FED can justify it that fast with all the jaw-boning of a "recovery". Plus they need a panic first when everyone is begging for it.
But while everyone on this forum, and mainstream thought goes "when QE3 comes we will rally again like QE2", this is where i differ. Ya, we may rally a little, but I think by then it will be obvious to most that we are fucked, and there will be a massive run on the markets.
You cant fight gravity and win, Deflation will win in the end, it has to so future generations will prosper, ya we will suffer, have a massive depression, but we have lived high on the horse for 30 years.
What i read from some poster here few months back which i agree 100%, the elites would rarher have a massive deflationary outcome and scoop up assets on the cheap. Would they rather have hyperinflation and get wiped out as well. I dont think so. A massive world depression would still keep the power's that be in power, and after the outcome, could be in power for another 100 years. Or lets have a "new power", like China. I dont think so.
All this talk of a new world order, a new currency, i dont buy it, these guys are not gonna give in that easily. With a massive world depression, the US would still be on top and would give them time to clean up their shit.
At the end of the day, you think these guys are gonna let a bunch of Commies take over the world. The free market is still the best way to go, they know it, and ya it might be fucked up right now, its still better than the Chinese system.
For all the faults of the US right now, greed, corruption, etc., would you rather have this system or that of China. For all of this talk of China, at the end of the day they are commies, and their economy is a huge bubble.
The next decade will be very tough, but the US will get its shit together, for all its fault, it still is one of the best countries in the world. Freedom, the best comanies in the world, education, will beat out the Chinese system.
All the faith people put in China is amazing, they lie more than the US, they have no freedom, and i could go on and on.
What an ignorant sheep.
Junked for stupidity.
As an American citizen who has lived in China for several years, I can assure you that ordinary people in the ordinary course of their lives are actually freer than you are (assuming you're in the US). Officialdom simply does not bother the people here on the organized and systematic level of intensity that applies in the US. This is a very laizze faire place for ordinary people living their ordinary lives.
Granted, this place has plenty of warts. If you wish to rock the boat you'll probably get your ass kicked. And crony capitalism is thick and the markets are undoubtedly rigged. But hey, which part of this does not apply to the US twice as bad?
One "freedom" you have in the US is the right to play in staged elections. It's pretty clear those elections mean little and are mostly for show. At least they dispense with the dishonest show-element of elections here, so that's a mark up for the Chinese. Another element of American freedom is the right keep and bear arms. But the American people are now pussies and no longer remember how apply the 2nd in order to ensure their elections count for anything.
3 cowards junk you..
3 idiots with no spine...
and Lots more that surround me as well would shout you down given the chance, but you speak the truth.
how long before this hippie, holy rollers are fucking dead or so old that they are not standing in the way of progress is the question. then! we will see some fucking change!
Hey man, I'm a Holy Roller (in Christ/two or more in agreement).
Holding up the mirror in front of their face, it seems a felony and contempt for public security will scare away government pukes in the U.S. still, let me tell yuh. In China, I can tell you without a doubt, I would be dead or in prison by now, just for holding up the mirror.
Now as far as your ''mirror image'' ...you are such a Holly Roller and you don't even know it. http://www.youtube.com/watch?v=wxBk8tW2jaw
P.S. Complain about being junked? Is it not an honor?
...if you wish to provoke morons to wake up, just ask them a deadly question, there is no need to kill a suicide. In a place like China etc... everyone is Tank Man. http://www.youtube.com/watch?v=9-nXT8lSnPQ In the States ...of the New World Order WTO IMF etc... Chairsatan's world, everyone is a Tank Man too. http://www.youtube.com/watch?v=s5fWvN9W9Ls You are correct, it's just a little more underground at this point, unless you are in the fight to stop Blind Government pukes from becoming Tank Drivers in Tiananmen, Iraq, Pakistan, Iran, D.C. etc... then it's almost funny, not really but, you can't help but laugh ...when you scare the shit out of people and you don't have a gun.
I would argue that the barriers for entry for entrepreneurs are less in china than the USA. We only have crony capitalism here (FED in bed with big banks)...
but I totally agree that QE3's rally will be "transient" as Ben Bernanke would say.
my personal view is that Fukushima has forced the hand of the Fed, but i'm only guessing. clearly "the Guns of August" trade is all on and no longer a trade (witness GM stock), especially if the story reported on Greece here at ZH turns to truth. if there's a cut-off of funding for the war in Afghanistan which almost happened last week "total friggin chaos."
God forbid the briefcases filled with stacks of $100s can't be delivered to bribe them into not fighting us. Our "wars" are a fucking joke!
Hey now, it is racist to criticise our wars now. Didn't you get the memo?
Those who don't believe in a hard asset backed currency (and there are many, both logical thinkers and the disinformation specialists), fail to consider that the global banking cartel will never successfully infiltrate, and thus destroy, Chinese society. There is no question, therefore, that we are facing WWIII with the Chinese; it's just a question of time. Either that or a revolution by the sheeple; yeah good luck with that; the Progressives, or should I say neo-marxists have had too much success already in dumbing down education in this country and fostering the decimation of the Constitution and Bill of Rights. BTW, those of you who don't believe that W was just another NWO Progressive just like dear old dad, have rocks for brains. IMO that the Chinese will trigger war by establishing a gold backed currency, definitely a no-no for the elites. If you haven't noticed that Pakistan is now sucking up to China and thereby received some free military hardware (fighter jets), then you haven't been paying attention. It's getting truly interesting for the elites.
China has a natural defense, which is it's language. The written language is nearly impossible to master by non-natives, and infiltration requires complete mastery of all the nuances, subtleties, idioms, etc., or recruitment of natives whose allegience can never be completely verified.
Russia is also, at it's core, an enemy of the banking elites, see Kosovo, although they have been infiltrated successfully in the past, the Russian people know the enemy, and they refuse to be mastered. They have the largest military reserve in the world.
Throw in India, Brazil. You have to wonder where Germany will line up.
Its going to get ugly.
You forgot about their Kung Fu, which is better than yours.
Russia is also, at it's core, an enemy of the banking elites, see Kosovo, although they have been infiltrated successfully in the past, the Russian people know the enemy, and they refuse to be mastered. They have the largest military reserve in the world.
Yep, and the vast majority are dead solid alcoholics.
Try fighting period when you have the DT's.
No, my friend, peace and a crisis resolution is about to come. http://theintelhub.com/2011/05/29/the-stage-is-set-for-a-nuclear-false-flag/
...then, after, the peace will be broken.
Market inflation and labor deflation go hand in hand with the demand destruction of debt inside the new world order of 'Black Hole Zero''. We are sealed beyond the Event Horizon, there is no stopping the momentum of corruption and failure. QE3 to be or not to be is not in question. What is upon this generation is a new global world market prison. This generation's gains are a dead man walking. http://www.youtube.com/watch?v=wOZrGHmMl4o
QE3=Hyperinflation.
No QE3=Default, a dollar worth sh*t and Hyperinflaition.
We're effed either way.
agreed.
default or hyperinflation. Fed will choose to kick the can again, and let the fiat ponzi game run its course. Once they have siphoned off all value from the dollar and given it to the GBC, then it is financial crisis the sequel.
Not to worry, the heros that put us in this position will step in to save the day. My guess is a partially gold back Amero or SDR of some sort.
"I want you to get mad"
http://www.youtube.com/watch?v=WINDtlPXmmE&feature=related