Friday, November 05, 2010

'Quantitative Easing' - That Slow, Sucking Sound...

Right after election day, the Fed made a decision that is going to have far reaching consequences. They decided to turn on the printing presses, print more than $600 billion out of thin air and then buy it back in the form of 'assets' - more federal debt.

The idea here is to create some inflation, and it has most of the world's developed economies beyond angry,because the intended result is to pay off our substantial foreign debt in cheaper dollars,raise the price of imported goods here in America and increase exports.

Argentina tried substantially the same thing about two decades ago, and after untold misery they are just beginning to crawl out from under it now.Or at least they were until this latest round of economic stress.

What happens with a weaker dollar is that commodities like oil - which are delineated in dollars - simply increase in price. If a barrel of crude cost $80 per barrel and there's 5% inflation, no problem Saddiq - now the price is $84,plus the increased cost of shipping it. And the cheap Chinese goods American have become used to in order to pump up their lifestyles increase in price to, as do food prices.

Exports don't make up the balance because American workers need raises to counteract what the inflation is doing to their paychecks, and goods cost more to ship overseas,so the countries you intend exporting to start to rely on their own domestic manufacturers more.

Obama's idea is to score political points by artificially cutting the deficit - and if Americans have to pay more for gas, clothing and food, well, we'll worry about that later.

Glenn Beck - whom I find entertaining but frequently disagree with - called this America's Weimar Moment, after Germany's runaway inflation post WWI. I doubt it will get anything like that far, but the allusion is not incorrect.

Instead of cutting spending and reducing taxes to boost investment and hiring, the president is doubling down on his agenda, and it's noteworthy that he did it while he was safely out of town and before the new Congress could be seated.

Once they're sworn in, hopefully the rot can be stopped before it goes too far.

We're in for some interesting times.

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Rosey said...

FF you are blaming this on Obama, but the Fed is an independent, non-partisan body. The president can hint at what he wants, but he can't tell them what to do...Then of course, there is reality.

Ron Paul has been agitating to end the Fed, and considering they are largely responsible for all the asset bubbles of the past 12 years, it's not as crazy as it sounds on the surface. The Fed is a cancer, and many of our problems can be laid at the doorstep of Greenspan and Bernanke.

I wish I had bought some gold a while back, I have been thinking about it (they always advertise on talk radio) but I don't want to be the guy to buy the top. The question is, at this point what do you do with your money? You can't earn any interest safely, and inflation constantly erodes it's value, making you poorer if you just stuff it under the mattress.

The malaise will never end unless we have competent leadership in DC and the Statehouses. We are looking a Japanese style lost decade or two...

Freedom Fighter said...

Hi Rosey,
I blame Obama and the Democrats because the ruinous and reckless spending, the failure to invest or permit US energy creation and the propping up of Fannie and Freddie pretty much limited what can be done anyway. Although there is plenty of blame to go around, I admit.

Personally, I don't advise buying gold. Aside fromthe fact hat it's an up market, lots of people did exactly that when the market originally crashed in 1928..and then FDR signed Executive order 6102 in 1933 that made it illegal to own all but $100 worth of gold coins and gold bullion. The owners had to sell them at a deep loss to the feds at $20.67 per troy ounce.

Some wealthy people back then were able to transfer their gold to Switzerland, but if you've been following what's been going on with regard to EU and US pressure on bank secrecy laws, that would not be really viable today for most people.

Don't count on Obama not doing the same thing today...even if it is an unconstitutional taking of private property without just compensation, just as it was in 1933.

Of course, you can bury it in the back yard and take your chances, but unless society totally breaks down ( which I do not predict) that's hardly much of a help it you can;t legally own it or sell it privately.