Stocks settled down yesterday, for a 40-point loss in the Dow index. Either the market had already priced in full-on quantitative easing (QE) forever or investors are beginning to wonder. Maybe an economy with falling household incomes is not a good place to own stocks. Maybe an economy that is barely growing doesn’t justify the highest stock prices of all time. And maybe the Fed’s $85bn-a-month bond buying spree doesn’t work.
Economists, analysts, and advisers have been trying to figure out exactly what QE really does. The Fed is adding more than $1trn to the economy every 12 months. It’s got to have some effect, right? In theory, it goes into reserves, which, in theory, the banks can lend out at a ratio of ten-to-one for a total potential increase to the money supply of $20trn.
But it’s not that simple. These are excess reserves at the Fed. Some experts insist that they are untouchables in the financial caste system, that they add nothing to the money supply.
But it’s not that simple either. The Fed creates money. It buys unwanted and unloved bonds from the banks. The banks take this cash and buy US bonds – transferring the cash from the Fed to the federal government, which would otherwise have to get it from other sources (at higher rates of interest).
All money, like water, eventually finds its way to the sea – occasionally washing away a few houses along the way. And when you add $1trn a year into a $16trn economy, it’s bound to raise the sea level.
How? When? We don’t know, but we’d avoid property too close to the shoreline!
The big news today is in the gold market. The price of gold has gone up by more than $60 since the Fed announced that it would not be tapering off any time soon. Why? Because gold is water-proof. No kidding. When the broad ocean of cash, credit, and connivance breaks into open fury – with howling winds and towering waves – gold will stand tall and sure, like an indestructible lighthouse. No financial wind blows it over. No drenching rain warps it. That’s why smart investors, and smart central banks, are watching the weather and accumulating gold.
By the way, the Fed’s announcement, according to the press, came as a surprise. No one should have been surprised. This is an economy that has come to depend on Fed stimulus. Every time the Fed has hinted that it might possibly, sometime in the future, unless it changes its mind, and the creek don’t rise, reduce its interference, the markets get the heebie jeebies.
Since the whole idea behind the Fed’s action is to avoid the heebie jeebies, they are now trapped by their own clumsy meddling. They broke it. Now they own it.
What can they do with it? Perhaps this is a good time to answer our critics. As you know, we have announced our availability to run the Fed. If selected, we promised to be derelict. We would abdicate immediately, shirking our responsibility completely. As you can probably imagine, we’re still waiting for the phone to ring.
C’mon Barack. We’re in Paris now. Yes, the US government is a little short of funds. But surely you can afford one long-distance call.
Bill Bonner on markets, economics & the madness of crowds
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But at least one dear reader believes our plans for the Fed are completely unrealistic and downright irresponsible. We’ll let him explain:
Bill, you would have to be a Luddite to believe what you say. Your way will be totally catastrophic, everything, everything has moved on, we cannot go back, should it be that you head the Fed.
I am not saying for a moment I like where we are, or that the banks are not making things worse, they plainly are. But in order to keep people working, you need to rely on the velocity of money, period.
Our reader goes on to tell us that we too are prisoners of the Fed’s actions, and of the paper-money system. There’s no way out now. Not without Hell to pay.
And guess what? He’s right. There is Hell to pay. But we guarantee you, dear reader, Hell will collect whether we like it or not. And the bill won’t get any smaller the longer we dodge the bill collector.
Look, what’s the real point of our current paper-money, Fed-managed system? It is so that the insiders can manipulate, obfuscate and confiscate. They manipulate the value of our money, lie about what is really going on, and steal wealth from savers and workers in order to pay for their pet projects and give money to their zombie friends. That’s the way it has always been and shall ever be, amen.
For example, Charles de Gaulle’s economist, Jacques Rueff, explained why inflation seemed to boost employment. It was because inflation robbed the workers of their wages, lowering labour costs and making it easier for employers to hire them.
And Marc Faber explained just two days ago how QE robs more than 90% of the population in order to pay off the elite. Where does all the Fed’s QE liquidity go? It goes into stock prices. Who makes money when stock prices rise? Wall Street and its elite clients. Everybody else loses.
And what about the zombies? We’ll explain that part of it ourselves. The federal government borrows the Fed’s ersatz dollars at record-low interest rates. What happens to the money? Does it go to the taxpayers? Does it go to real, productive businesses, or to real, productive workers? Nope. It goes to zombies of all sorts – to the seven out of ten families who get more from the government than they pay in taxes, and to all those contractors we passed along the Dulles Corridor on our way to the airport.
QE is essentially a zombie enrichment programme. The sooner it ends, and the sooner the Fed is abolished, the better off we all are.
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