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Thursday, August 11, 2011

“Night of the Living Fed.” The Fed feeds on the Global Economy

Quantitative Easing (QE) is a policy promoted by Central bankers worldwide, particularly by the US Federal Reserve and The European Central Bank whereby they print paper and call it money. It is nothing short of legalized counterfeiting; it works temporarily in stimulating segments of the Economy like the Stock Markets but ultimately results in devastating inflation. In the case of most countries whose currency is used only within the country, as for example in Zimbabwe, such Central bank policies affect only the citizens of that country. In the case of the US dollar, which is the world’s reserve currency, the Fed’s policies affect the whole world by causing inflation in all corners of the globe. These policies threaten not only the US Economy but the Global Economy and eventually the Global Economy will be swallowed up by such policies. This is the reason why China has severely admonished the US to clean up its fiscal house for it threatens the Chinese Economy as well as the Global Economy. The question is not if this will happen, the question is how long will it take for this to happen? All signs point to a Global Economic meltdown coming very soon, much sooner than most people would expect!

QE is nothing more than a “bargain with the devil.” The problem is that cheap borrowing costs also make a fertile environment for bubbles, which eventually will burst. Speculators borrow cheaply and make even bigger bets in the stock market. “The effort to help the economy sets up another more dangerous bubble,” warned Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo on October 27th, 2010. “It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It’s also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible,” he said. 

“In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment,” Grantham wrote in a report titled “Night of the Living Fed.”

Fed policy has resulted in “extraordinary destructiveness and ruinous cost. I would force the Fed to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times,” - the Greenspan/Bernanke Put. “It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles,” Grantham added. Indeed, for the past decade, stimulating the US-economy has based upon blowing one bubble after another. Once the Fed stopped the daily injections of QE on July 1st, the QE-2 bubble on Wall Street began to burst spectacularly, and led to the loss of $3.8-trillion of paper wealth worldwide.

China threatens to stops buying US treasuries

On August 8th, Beijing shocked the markets again, in a stinging commentary carried by the official Xinhua news agency. “China has every right to demand the US address its structural debt problems and safeguard China’s dollar assets. Washington needs to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone. To cure its addiction to debts, the US has to re-establish the commonsense principle that one should live within one’s means,” Xinhua said.

Fears that Beijing is preparing for a confrontation with Washington sparked widespread selling in Asian stock markets on August 8th, and sent the price of Gold soaring above $1,700 /oz for the first time ever. A former top official of the National People’s Congress, Cheng Siwei said in an interview that Beijing should use future foreign reserves to buy bonds of other countries, instead of buying US Treasuries. “In my opinion, in regards to US Treasuries, the best strategy is no buy, no sell. I think maybe that’s the best strategy,” Cheng said.

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