This page has been archived and commenting is disabled.
QE Can't Save the Day... We've Done a Version of It For Over 10 Years
While most commentators proclaim that QE is a completely new phenomenon, we have in fact seen a version of it in the form of the Fed’s and Asia’s (especially China’s) purchases of US Treasuries/ currency pegs over the last decade or so.
Indeed, today, the Fed, China, and Japan collectively hold 61% of the $10 trillion of US debt held by “the public.” When you add in the additional $4.6 trillion in US debt held by “intragovernmental holdings” (basically the Federal Government buying Treasuries by raiding Social Security and other pension funds) you find that Asia and the Feds have monetized $10.7 trillion of the US’s total $14.6 debt (roughly 73%) over the last 20 years.
In this context, unveiling even more QE (the Fed buying US debt) is virtually pointless. Indeed, the Fed would have to unveil a QE plan of $2 TRILLION just to make its US debt ownership on par with the Federal Government’s “intragovernmental holdings.”
To put a $2 trillion QE program into perspective, that would be on par with the Fed unveiling a QE program equal to QE 1, 2 and some of QE lite combined in one single program.
Now, if QE 2 which was only $600 billion, blew the price of food and energy through the roof, how would a QE program of $2 trillion impact these items? Do you really think the Fed could unleash a QE program of that size without inciting full-scale unrest in the US, not to mention destroying the US Dollar.
And with the Fed already as unpopular as it is, Obama’s polls falling to new lows on a weekly basis, and Bernanke well aware of the potential legal issues coming his way, the odds of the Fed doing more of this is going down by the way.
Indeed, the Fed’s balance sheet is already close to $3 trillion in size. How would commodities and the US Dollar respond to a Fed balance sheet of over $5 trillion? The Fed has already proved it has no means of draining the liquidity its put into the system in the last two years. What impact would an additional $2 trillion have?
The short answer is that QE 3 of that size would kill the US Dollar, destroy the US economy, and result in Bernanke being forced to resign at the least and possibly the Fed being dissolved.
Do you think the Fed would do this? These guys are morons, but they’re not so stupid as to take note of how the Greeks responded to financial ruin.
Another consideration is that each new Dollar of QE has created less “bang” for the marketplace. As I noted in previous articles, QE 2 proved that each new Fed stimulus program is less effective than the first. At that time I wrote:
Consider that QE 1 provided $1.25 trillion in liquidity to the markets. From the date of its inception until its end, the S&P 500 roughly 540 points. Put another way, each $10 billion was worth 4.3 points on the S&P 500.
In comparison, QE lite and QE 2 put roughly $900 billion into the market (roughly 75% of QE 1) creating a 251-point rally in the S&P 500. In this case, every $10 billion in additional capital was worth 2.7 points on the S&P 500.
So in financial terms, QE 3 is not likely to have a large impact on the market. The reason is that the entire US GDP miracle has been induced by some form of QE whether it be the Fed, China or Japan buying US debt or the US raiding pension funds to buy Treasuries over the last 20 years.
Combine these facts with the inflationary pressures created by QE 2 as well as the current political climate which is increasingly anti-Fed, and it’s clear the Fed will not be able to unveil QE 3 without some kind of catastrophe hitting first. Put another way, the Fed will be acting purely reactively, not proactively going forward.
This in turn sets the stage for a BIG DOWNSIDE upset for the markets. Indeed, I fully believe we’re on the verge of a potential Crash today which will make 2008 look like a picnic.
If you have yet to prepare yourself for what’s coming, my Surviving a Crisis Four Times Worse Than 2008 report can show you how to turn the unfolding disaster into a time of gains and profits for any investor.
Within its nine pages I explain precisely how the Second Round of the Crisis will unfold, where it will hit hardest, and the best means of profiting from it (the very investments my clients used to make triple digit returns in 2008).
Best of all, this report is 100% FREE. To pick up your copy today simply go to: http://www.gainspainscapital.com and click on the OUR FREE REPORTS tab.
Good Investing!
Graham Summers
PS. We also feature four other reports ALL devoted to helping you protect yourself, your portfolio, and your loved ones from the Second Round of the Great Crisis. Whether it’s my proprietary Crash Indicator which has caught every crash in the last 25 years or the best most profitable strategy for individual investors looking to profit from the upcoming US Debt Default, my reports covers it.
And ALL of this is available for FREE under the OUR FREE REPORTS tab at: http://www.gainspainscapital.com.
- advertisements -
Gosh, there's just so much to read my dogs are dying of starvation, mi esposa has run off with the UPS brown guy, and my neighbors have taken up a collection to buy my house because I have no time to paint, roof, and mow.
Why can't my shorts just bring my ship in so I can stop all this infernal noise?
Ben, will you just let goddamned thing epically fail, so my parsnips are buttered forever, and I can retire to a South Pacific Island and follow my dream of painting young, female nubile nudies on brightly colored canvas?
Congrats , you were right Graham ! Market will be disappointed this time ( operation twist = BS ) , expect more extreme volatility across all sectors . QE1 will be remembered as good old times
The velocity of money has fallen below one and has been there throughout QE. Money is not being used to expand the credit supply, it is being used to pay down existing debt and repair balance sheets. The FED is powerless over the credit deflation forces at work.
http://research.stlouisfed.org/fred2/series/MULT
cue up the phoenix capital theme music
http://www.youtube.com/watch?v=rH6b_lSQst0
Largest QE ever was the 70% of the GDP supported by homeowners using their houses as ATMs which won't happen again in our lifetime...this massive spend for flatscreens and trips to Cozumel is over and had none of the low rates happened over the last 15 years, GDP growth would have been at 1% or less which is where we are now. Get used to 1% growth at best with wholesale destruction of mfg industries while the rest of the world drags down US wages to "global levels" and rips off our R&D spending by duplicating in a month what it took someone 5 years to figure out...
They get the tech for cheap, and we get the end product for cheap (export inflation). US R&D might be getting ripped off, but developing nations are having their purchasing power "ripped off" as well. Can't have your cake and eat it too.
yep, can't argue with that,,,,,,, repeal NAFTA is a shot but then we loose all our hegemony over the globe and will have to close all our bases. So we gonna go down the road of deep down depression excessive misery, gloom despair and agony on we
"Four times worse than 2008" And you know this how? Oh right; the little glass ball with the snowflakes in it. Super.