Deflation not Inflation is coming

Some think Inflation bugs like Peter Schiff, Marc Faber, & Ron Paul are wrong. Deflation not hyperinflation is coming to America. This will result in a Great Depression. Watch this xtranormal video

What would happen if USD collapsed ?

Read 24 June 2006 public article by Christopher Laird :
What would happen if the USD collapsed ?

Marc Faber : Bernanke sinking US ship

Marc Faber : We have to distinguish between the stock market & the economy. As you know the real economy began a recession in late 2007 and then between September 2008 & March 2009 we fell off the cliff, and then we were at a very low level of economic activity. Then the huge stimulus packages kicked in and the money printing kicked in. In other words Zero interest rates & Quantitative Easing by the Federal Reserve & also other central banks. That then stabilized the global economy, and when you have car sales dropping 50% and more, then you're going of course to have a rebound - but the question is how sustainable the rebound will be? Or is this rebound at the present time actually borrowed from the future. And in my sense, here I am talking about the economy, that the economy near term can recover. Maybe the recovery will be somewhat lengthier than expected, then crack up boom because the first stimulus package in the US probably will be followed by a Second one and money printing will lead to even more money printing next years so it could last say 12 to 18 months. And then we will get another set of problems arising from each government action has unintended consequences.

QE creates staggering amount of New $

By 'Quantitative Easing' the Fed simply creates new money to "inject cash into the system".

The scale is enormous: since 2008, QE created $1.7 trillion, & another $600 billion via QE2. The Fed's balance sheet has ballooned from $900 billion of assets in August 2008, to $2.3 trillion.

Before QE, assets on the Fed's balance sheet was 6% of GDP. Now it's a massive 16% of GDP!

Can that really leave no adverse effects ?

Economists criticise Fed's plan
Fed doesn't understand risk of QE (YouTube)

Bond Bubble about to burst ?

Fed battles deflation but people battle inflation.

While the world is focused elsewhere ...

related videos by VisionV

QE will starve middle-class

World decries US Dollar moves

Obama's appeal for economic stimulus via monetary injection was viewed as debasement of the US Dollar & considered a currency war by other countries. They don't want the US to monetize its past sins at their expense.

The World Shorts the Dollar (Ron Paul)

Fed's double-speak

The Fed claims they are not trying to weaken the Dollar, but prevent deflation ..... that really means promote inflation.
Fed's QE2 raises more Q's than A's (Bob Auer)

Gold won't go below $1,000 - Marc Faber

Despite gold rising nearly 30% this year, Marc Faber ("Dr. Doom") predicted :

"We will not see less than the $1,000 level again ..... Central banks are all the same. They are printers."

Economists condemn QE2

[WSJ] open letter to Ben Bernanke :

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Global Currency Devaluation - Inflation for all

As countries competitively depreciate currencies to promote exports, the eventual result is inflationary – weaker currencies lead to higher prices against all goods & services.
Currency Wars - by Robert Murphy [Mises Daily: 15 Nov 2010]

China slams US for QE2

China being the largest holder of US government debt, not surprisingly reacted angrily at the Fed's unabashed money-printing - which is sure to devalue their large reserves of US Dollar-denominated assets.

“As long as the world exercises no restraint in issuing global currencies such as the dollar ... then the occurrence of another crisis is inevitable” - Xia Bin, advisor to China's central bank.

"As a major reserve currency issuer, for the United States to launch a second round of quantitative easing at this time, we feel that it did not recognize its responsibility to stabilize global markets and did not think about the impact of excessive liquidity on emerging markets." - Finance Vice Minister Zhu Guangyao

China chides "deteriorating debt repayment capability" & "fundamentally lowering ... national solvency"


China caught in a bind :

China cannot just dump the US Dollar, being the only international reserve currency, for now. It can't switch out of Dollar into Gold in a big way - that would drive up the gold price dramatically. It can't transfer to high-growth currencies like Aussie Dollar or Brazilian Real - that would cause such appreciation of these currencies that China's imports of natural resources become more expensive.

Therefore, China's central bank is left with these options :

1. buy Euro or Yen assets - but that would drive these currencies up and the chinese Yuan down & provoke Europe and Japan to accuse China of currency manipulation
2. buy natural assets like oil, gas, mines in other countries - but this stirs nationalist sentiments against foreign ownership of natural resources
3. equity investment or partnership with strong companies - like Berkshire Hathaway, Goldman Sachs, JP Morgan etc

Beyond the immediate term, it's more likely China would further its proposal of an alternative international monetary system - one not based on the paper currency of a single country.

Is the Dollar sound ?

James Grant - New York Times (Nov 13) :
 

"By disclosing a plan to conjure $600 billion to support a sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured" !

QE2 - Last gasp of Monetary System

Unrestrained creation of Dollars will destroy its purchasing power & lead to high inflation.

The Fed has just raised cost of living not just on all americans, but the world.


[watch on YouTube]

National Inflation Association :
Fed's QE will starve middle-class americans

QE is creating 3rd and last bubble

Harry Dent : Quantitative Easing is creating another & probably final bubble.

Lowering short term rates merely makes borrowing and lending more attractive without expanding money supply directly. It also encourages banks to borrow short term and invest in longer term Treasuries which keeps rates lower. Quantitative easing literally prints money out of nothing and buys Treasury bonds (and now mortgage securities). That both puts money directly into the system and pushes down longer term rates which are more critical to both borrowing and asset prices. QE is much more potent and like “crack” compared to the “speed” of lowering short term rates. The first “side effect” is the sudden drop in the dollar which raises food and gas costs for everyday consumers. The second is a return of bubble-like market activity from stocks to junk bonds to commodities which will burst again and critically injure aging investors and retirement funds. The third is lower returns on retirement portfolios which lowers the earnings and spending of the largest segment of aging consumers. We can’t be far from a crisis that forces Treasury yields and all bond yields sharply up as occurred in Europe in April of 2010. And down the road when the Fed sells those bonds, it will cause interest rates to rise again as you don’t get something for nothing.
.....
 The Fed has now stimulated a third and even more perverse bubble, which is the first bear market bubble we have ever seen. At least the previous bubbles had rapidly growing productivity and demographic growth to fuel them. The current bubbles only have government stimulus as their fuel despite slowing economic trends and the obvious failure of such stimulus. The current bubbles in stocks, gold, commodities and junk bonds will burst and greatly injure investors, retirees and pension/retirement plans again. The greatest risk is that a falling dollar prompts foreign countries and investors to stop buying and/or start selling U.S. Treasury bonds and that forces a sharp spike in long term interest rates across the board. In addition, the bond markets could simply continue to observe deteriorating economic activity with mushrooming stimulus and start worrying about rising U.S. deficits and raise interest rates suddenly as they did with Europe in April of 2010.

QE's crippling cost to developing countries

QE2 caused other countries to bemoan the knock-on effects on their own economies & brace for measures to try protect themselves.

With globalized finance, lower US interest rates accentuates the carry trade – investors borrow cheaply in the US and invest in other countries where interest rates & anticipated returns are higher.

Massive inflows of “hot money” into emerging markets cause their currency to appreciate strongly thus inhibiting exports, & stoke asset bubbles. For example, Brazil's Real rose a stark 35% from 2008.

Developing countries have to shield their currencies by accumulating reserves or imposing capital controls, perhaps both. Accumulating reserves is costly as these funds are withheld from investing in their own economies. Capital controls on the other hand are difficult to implement, attracting critical sentiments.

Amidst global frustration, exasperated governments have little choice but to competitively devalue their currencies to support exports.

What then can we expect to see from the looming specter of “currency wars” ?

Who pays the bill for Fed's QE2

QUANTITATIVE EASING explained

Quantitative Easing is economic manipulation by simply creating money out of nothing !

Although there is more money in circulation, there is still the same amount of goods & services - this risks higher prices, or inflation.

Chanos says China to implode

Short seller James Chanos thinks the Chinese economy is the next Enron.
Bears think China falsifies economic data & has overheated its economy with over-construction of malls, luxury stores, & infrastructure.

A Chinese collapse will affect America - limiting their ability to buy US debt, & provoking unknown political regime change.

However Shaun Rein thinks Chanos is wrong, & agrees with Jim Rogers being bullish about China : 3 reasons why Rogers is right & Chanos is wrong.

Jeremy Grantham criticizes Fed policy

Fund manager Jeremy Grantham notes in GMO Quarterly Letter Oct 2010 :

1. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
2. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
3. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
4. 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.

CNBC interviews Jeremy Grantham (video)