The most predictable financial calamity in history
Posted by seumasach on January 25, 2011
24th January, 2011
In November 2010, the Federal Reserve announced a second round of economic stimulus commonly referred to as Quantitative Easing (QE2). The reason, according to the Fed, was“progress toward its objectives has been disappointingly slow.” So, to try and turn the economy around, the Fed said, “. . . the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter (June) of 2011, a pace of about $75 billion per month.” (Click here to read the complete announcement from the Fed.) QE means the Fed basically creates money out of thin air to buy debt. The current money printing orgy is financing more than half of U.S. government right now. The first round of QE bought toxic mortgage debt and bailed out the bankers.
What was not said in the press release was much more important and may go down as one of the biggest turning points in the history of America. Bringing on QE2 meant QE1 ($1.75 trillion) failed to provide a sustained recovery. It also exposed the $12.3 trillion total spent or loaned by the Fed since the meltdown of 2008 failed to give the economy a lasting boost. The Fed did save some businesses and all the big Wall Street Banks from bankruptcy, but we now know nothing has really been fixed.
This brings me to one really important question. I put this question to a group of well-known market experts, economists, investment bankers and big thinkers. The five guys you are about to hear from have at least one major thing in common. They all predicted tough times for America when most didn’t see it coming. So, I asked them all last week to peer into the not-so-distant future for their take on “What happens when QE2 ends?”
World renowned gold expert Jim Sinclair said, “States and Municipalities can and will go broke. The economic impact will act to foil QE. That will result in QE to Infinity regardless of MOPE. (Management of Perception Economics) Therefore, Washington and the Fed will backdoor rescues by buying State & Municipal debt, a form of QE.”
Next is prolific writer and author James Howard Kunstler. He specializes in novels about fictional depictions of the post-oil American future. Here’s what Kunstler says about the end of QE2, “My guess is the Fed will find some other way to buy distressed securities or “investment-like” things. The models for that are the Maiden Lane portfolios (there’s more than one) which are stuffed with crap like bankrupt hotels. Yes, the Fed owns bankrupt hotels! If they don’t buy up what are essentially loans gone bad, the system sucks itself into a black hole of compressive deflation. That outcome is likely anyway, because the Fed won’t be able to keep up with loans gone bad.”
Rick Ackerman, professional trader and founder of the website and newsletter called “Ricks Picks,” says, “I don’t think there’s a snowball’s chance in hell that promiscuous easing will end, regardless of what the fraudulent successor to QE2 is called. The commentary running right now at Rick’s Picks says that easing in the form of a U.S. bailout of cities and states could become politically necessary as early as this year, although a decision to do so would trigger the worst run on the dollar in history. Look for the bailout to happen anyway, but in a way that tries to obscure the fact that it is being done with funny money. The subterfuge won’t work for long, since public workers will figure out quickly that unless their retirement benefits are indexed to inflation, they’re going to get paid in confetti.”
James Rickards is a heavyweight in the world of finance. He is an expert in Threat Finance & Market Intelligence. “What happens when QE2 ends?” Rickards says, “The Fed never said that QE2 would end; that’s a popular misconception but they never said it. What they said was that they would buy $600 billion of intermediate term Treasury securities by June 2011. They never said that was all they would buy. They never said they would stop. The comments were carefully worded so that $600 billion by June was a targeted minimum but they never said anything about a maximum; technically there is no maximum. The first QE program ended in 2010 and the economy immediately began to fall into a double dip. QE2 was hastily put together to truncate the double dip. If they end QE2 the double dip scenario is back on the table. Therefore they will not end it. They will keep monetizing debt, whatever it takes, as long as it takes until there is a self-sustaining recovery. However, none of the predicates of a self-sustaining recovery are in place, therefore they will just keep printing money as far as the eye can see until the process becomes dynamically unstable and the dollar begins to collapse. So, bottom line, it is a mistake to talk about the “end” of QE2 because there is no end in sight.
Finally, economist John Williams of Shadowstats.com predicts a financial meltdown even if QE2 is extended. Williams told me, “I think you will see much greater economic and systemic-solvency troubles ahead than commonly are expected. Accordingly, I would expect a QE3, or an expansion of QE2 before it is scheduled to have been run through.”
I can’t imagine how the U.S. could stop printing money in June and then turn around and ask the world to start buying our debt again at a rate of $75 billion a month. Of course, we would want to pay discount rates in order to keep mortgages affordable and real estate prices from crashing. There would be no legitimate buyers unless we were paying much higher interest rates. Higher rates are the last thing the Fed wants to see because it would kill what little is left of this so-called “recovery.”
In summary, all the experts I polled think QE Will Not End. That will surely mean an imploding U.S. dollar and exploding inflation. This is scheduled to happen by the end of June, making this the most predictable financial calamity in history.