by Graham Summers
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 this in two weeks’ time are
next to none.
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 sets the stage for a MAJOR upset to the downside in the near
future. Indeed, I fully believe that we may be on the verge of a market
Crash. Behind the scenes, the market is on DEFCON Red Alert. Ignore what the
mainstream media and White House are saying, we are in BIG TROUBLE.
So if you’ve not already take steps to prepare for what’s coming, you need to
do so NOW while the markets are still holding up.
Because once the selling pressure comes back into the markets… it’s going to
be far FAR too late.
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