Having pumped the financial system with liquidity for over two years, Ben Bernanke has now decided to take his foot off the pedal temporarily. Indeed, the Fed is not only NOT launching QE 3 soon, but is going to let QE 2 end.
Why is this?
It’s really quite simple. QE 2 primarily did two things:
1) Push the stock market higher
2) Gun oil and commodity prices through the roof
The Fed wants #1. The only problem is that #2 is making its money pumps even MORE unpopular with the US populace. Even mainstream financial media outlets like the Wall Street Journal have begun criticizing if not slamming the Fed’s policies.
So before the Fed can continue to bail out its buddies on Wall Street, it needs some serious justification for more QE. And what better than a market Crash?
After all, the Euro crisis and market collapse in May 2010 was what laid the groundwork for the Fed’s QE lite and QE 2 programs. A similar drop in stocks today would give the Fed a clear “see what happens when there’s no Fed help?” angle to take when it begins discussing QE 3.
Indeed, if stocks were to drop off a cliff, they’d drag commodities down with them. This would take some of the inflationary heat off of consumers, which would allow the Fed to continue its BS “inflation is transitory” mantra and pave the way for QE 3.
Understand, I am absolutely certain we’ll see QE 3 in the future. But the Fed first needs justification for it. And a market collapse would be perfect.
Again a collapse in stocks would:
1) Let the Fed claim that QE is needed to keep stocks up.
2) Take down commodity prices thereby letting the Fed claim inflation is falling
3) Give the Fed justification for QE 3 from an economic and asset price standpoint
We may in fact be seeing the first hint of a drop in stocks today with the precious metals sector getting slammed and the US Dollar rallying. This is precisely what happened before the stock collapses of 2008 and 2010.
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