The Fed Will Not Succeed with Quantitative Easing

Quantitative easing; everybody is doing it, like the Bank of England, Japan and even Switzerland. Quantitative easing is a tool of monetary policy. The effect is an increase in the quantity of currency without regard to maintaining its quality. Quantitative is relating to, measuring, or measured by the quantity of something rather than its quality. On 18 March, 2009, Bloomberg reported that the Federal Reserve announced its intent to purchase $300B of longer-term Treasuries. Predictably, the Federal Reserve has decided to exacerbate the quantitative easing party.

What is really going on is the great credit contraction. The system does not collapse but evaporate. As the evaporation has continued and intensified, capital--both real and fictitious--has sought safer and more liquid assets by moving down the liquidity pyramid. A significant, but still miniscule amount, of capital has already evaporated over the past year. This is basic economic law being asserted. A predictable consequence has been for Treasury rates to near 0% because they are considered among the safest and most liquid assets. (click on chart to enlarge)

But the United States Treasury bubble is the biggest of all and there are reasons how and why the Treasury bubble will burst.

At all times and in all circumstances gold remains money. Gold is the ultimate form of payment and is always accepted. Gold is the safest and most liquid asset. As I surgically explained, the ETFs GLD and SLV are NOT gold or silver. The question then becomes: Will capital move up or down the liquidity pyramid?

How did gold perform in reaction to Bernanke’s announcement? A monstrous and almost immediate rise of about $60 per ounce (click on chart to enlarge). The gold cartel GATA must have had its hands full yesterday. This is all the more ominous because gold is not just a commodity or portfolio asset but a currency which, through tools like GoldMoney, can be used in ordinary daily transactions. Because silver is also money, the chronic silver backwardation is equally if not more ominous (click on chart to enlarge).

I have long asserted that the FRN$ will be the last major fiat currency to evaporate in the great credit contraction and that gold will still be there when the next credit expansion begins. This misguided action by Mr. Bernanke will only hasten the rate of evaporation. The great credit contraction has just begun and in the aggregate, capital will continue moving down, not up, the liquidity pyramid.

Comments

[Al-USA:]

Maybe the solution lies outside of capitalism? Hey, if that's what it takes to advance civilization, why not? Capitalism had a good run for the last 500 years but growth can not continue forever...

Mar 19 02:17 PM

[Socialism c...:]

Guns give a man guts. Consider the following words of Thomas Jefferson:

"A strong body makes the mind strong. As to the species of exercises, I advise the gun. While this gives a moderate exercise to the Body, it gives boldness, enterprise, and independence to the mind . . . Let your gun therefore be the constant companion of your walks."
--Thomas Jefferson, Letter to his nephew Peter Carr, August 19, 1785.


On Mar 19 09:29 AM pacman1947 wrote:

>
> What can the common man do to protect and defend his family? His
> way of life? What little remains of our dignity?
>
> Guns won't help, yellowhoard. Guts might, though. Someone must stand
> up to this attack on our very foundation of commerce.
>

Mar 19 02:43 PM

[yellowhoard:]

Has anybody been playing the coal companies today? It's like shooting fish in a barrel. Take a look at ACI and PCX. These stocks have been dying for a starting gun. They got a shotgun start yesterday.

Mar 19 02:44 PM

[Bob 123:]

I think we already found out the merits of a "free" (i.e. unregulated) market.


On Mar 19 01:54 PM Whitehawk wrote:

>...... and the merits of a free market.

Mar 19 02:48 PM

[Socialism c...:]

You really need to step back and realize what has happened here. It is NOT capitalism that has failed! It is HUGE Government and its interference with capitalism and with our freedom, that has caused this mess!! Excessive taxation...a tax code so huge and complicated that it has spawned an entire industry, and also a trail of corruption in its wake -- even the buying of our Congressmen -- is a big part of the problem. Government size and spending is out of control...social engineering in housing, with the Community Reinvestment Act enacted through Fannie & Freddie, is responsible for the mortgage crisis. That interference in mortgage lending and banking shifted things to the point where F & F own 2/3 of all mortgages in the U.S.! Other banks could not compete with GSE rates, so eventually these GSEs owned the market and dictated the terms. Banks had to be content to be originators and then sell off the loans to F & F.

The problem is not capitalism. Free markets work...when they are actually free. Our government has corrupted them. It has FAR overstepped its Constitutionally defined roles, and needs SERIOUS downsizing.


On Mar 19 02:17 PM User 270430 wrote:

> Maybe the solution lies outside of capitalism? Hey, if that's what
> it takes to advance civilization, why not? Capitalism had a good
> run for the last 500 years but growth can not continue forever...

Mar 19 02:49 PM

[coldcut:]

Is "free market " really free? It's only natural that the sharks (political/economic elites? financial products genius? investment bankers? Madoff?) feast if you let them roam free. Anyone who claims he knows how to control the nature is delusional...

www.youtube.com/watch?...

Mar 19 04:33 PM

[Larry House:]

Very interesting exhange of ideas. I have few insights; wish I had more, but aren't we living in one heck of a time? We are going to have to get back to a simple life of self-reliance, like when I was a kid in the '50s. Thank God I am a country boy, and country boys can survive--I hope!!

Mar 19 04:37 PM

[dcb:]

I hate to say it, but the actions of the fed, treasury, congress and white house only add up together if you assume the purpose of all these events is to put more money into the hands of the people who already have it. I dare anyone to try and fight each and every point, because in this method of analysis. yesterdays actions were and end around congress and the public who are actually making some head way in stopping the continued money stream to wall street. There was no legislative approval required, (unlike the handouts Talf, Tarp, and others) hat will now hopefully be blocked.
Overnight my bank account dropped 5% against the Euro which amounts to a hidden tax on every american who has been saving and working hard for their money without going into debt. On the other hand it ensure wall street will make money at the far end of the yeild curve as it lends out. it is a 1 trillion dollar subsidy and the expense of every hard working person's bank account. Unfortunately, the public isn't aware that big Ben reached out and took 5% of their money overnight. 50% of american's don't even own stocks, and those that haven't played the market and lost are being forced to pay up without even knowing it.

Mar 19 05:17 PM

[Carneades:]

The Fed Follows Suit
Yesterday, the Federal Reserve announced that it will increase its purchases of Mortgage Backed Securities to a total of $1.25Trillion(yes, that's correct), and, more importantly we think, embark upon an aggressive Treasury purchase program worth at least $300Billion. We would like to note that while the Fed's actions "stunned" many an investor, those regular visitors to this page were warned of these Actions in advance. On March 7th, we posted an analysis titled "Bank of England Leading the Way?", in which we predicted the inevitability of aggressive Treasury security purchases by the Federal Reserve.

As is usually the case, the Economic Intelligentsia immediately put forth the usual faux-analysis on the subject. We are told that the Fed is trying to "force" investors out of Treasuries and into riskier asset classes, that the Fed's purchases will be relatively insignificant when compared to the total amount of planned Treasury issuance, and that the Fed's actions will help lower borrowing costs throughout the economy! In our opinion, a more reliable and profound statement arrived via the price and volume activity on the SPDR Gold Trust ETF (GLD) in the moments following the Fed announcement. At the risk of appearing cliche, "A chart is worth a thousand words".

Concerning the size of the Treasury purchase program relative to GDP,budgets, planned issuance,deficits, etc., we would counter that at this point, all such ratios are irrelevant. We say so for the following reason: The size of the program will not stop at $300Billion. For now at least, the headline figure of $300Billion has proved sufficient in lowering the yields at crucial points across the Treasury curve. Unfortunately for the Fed, the Market is no fool, and will undoubtedly begin to question the credit-worthiness of the United States Government. As has consistently been the case over the past 18 months, each Fed action has been met with a swift, shrewd Market counter-action.

We expect that as the Fed/Treasury/Congress continue down this path, the eventual consequence will be the loss of the United States Government's AAA credit rating. Our message to those who deny the veracity of this prediction: Just wait and see.

TheValueatRisk.blogspo...

Mar 19 05:41 PM

[Dr. Realist:]

Dudes!
Go back and read your Marx. And find out about Surplus Value (Value added) and find about about all its permutations and how it is filtched and squandered. Then you will understand the whole dang thing. Do a little study! Gold is the last resort but even that won't save you in the long haul. Socity will be a changin' but its going to be a long tough haul Ho Hum
Bob

Mar 19 06:11 PM

[bricki:]

Jim Rogers is buying farmland. It seems to me that is a pretty interesting alternative to the guns ammo and food investment. I mean over a certain amount guns ammo and food becomes hard to manage.

The one Achilles heel of gold is that you can't use it to buy food in a famine. This is the one time that gold loses value.

The ancient Sumerians had an even more primal form of money, the shekel, which is a fixed weight of barley.

Mar 19 06:25 PM

[GeminiAtlas:]

hmm, Maybe we'll soon be asking our banks "can I have my account denominated in 9mm or 0.45" cal?"

Mar 19 06:33 PM

[5142152-337:]

THANK YOU TRACE FOR THIS TERRIFIC ARTICLE!

Mar 19 07:47 PM

[soycapital:]

Yes, great article. Thank you!!

Mar 19 09:42 PM

[mcnoodles:]

Investment 101 says do not borrow to invest and speculate... Is this not the perfect time to borrow as much funny money as possible and buy gold???

Mar 19 11:17 PM

[bypass:]

Fear is the biggest threat humanity faces. If left unchecked it can paralyze, enslave, and destroy people.


On Mar 19 01:08 PM henarl wrote:

> It is now becoming as hard to find ammo as it is to buy gold bullion
> coins at anywhere near spot. The next big bubble is fear, which
> is something the government and the Fed has very little control over.

Mar 20 12:27 AM

[johngonole:]

I couldn't help notice the negative the guy with the confederate flag comment got. And I don't blame those who panned his comment in light of how that flag is viewed today. When I first moved to the South pretty much just stupid ignorant rednecks flew the thing stating the South would rise again.

Funny thing is that economically it really has. Now onto my real comment. After living down here for a long time though I've come to realize that their are still a few who actually do view the confederate flag for what it stood for back in the civil war days. That is that it was a flag of defiance and rebellion and succession.

Personally however because of the modern meanings of the confederate flag I just think people should be flying the old, "Don't Tread on Me" Gadsen flag. I imagine if 30 million people all the sudden were flying those flags on their front porches. The elite media, the washington elite, and their Bankster Masters would have to take notice. I have one and I'm putting it up Friday! The responsible citizens and the hard working people of this country have been silent for way too long. Its time to get back to work and to demand that the government stay out of our way and stop mucking things up. If the middle class can't move upward due to inflation how the heck can the lower classes ever have any real security.

Mar 20 01:41 AM

[jstratt:]

I am not anti gold and I do think we will have some inflation which supports gold. However for anyone considering putting large net worth percentages in gold I would caution you to be careful.

I have seen many gold bugs in my life.
1) in inflationary 1980 a Chief Engineer buying gold at $500 an ounce - bad results
2) Hunt bros trying to corner silver - bad results
3) Guy buying gold at local auctions - bad results

I could name others but so far the results are one sided on the down side.

Gold may have its time for the first time in my lifetime. Many other times in the past it looked like Gold's time had arrived.

I added the Hunt bros because if gold rises much, people will flood pawn shops selling gold back like happened with silver. Then you wouldnt like your own personal Liquidity pyramid.

Mar 20 08:36 PM

[Iben Hadd:]

I have a friend from Salvador he told me chains are the answer. You go into a bodega with no money but a 20q chain on your neck. You order a taco and the owner removes a link from your chain.


On Mar 19 06:25 PM bricki wrote:

> Jim Rogers is buying farmland. It seems to me that is a pretty interesting
> alternative to the guns ammo and food investment. I mean over a certain
> amount guns ammo and food becomes hard to manage.
>
> The one Achilles heel of gold is that you can't use it to buy food
> in a famine. This is the one time that gold loses value.
>
> The ancient Sumerians had an even more primal form of money, the
> shekel, which is a fixed weight of barley.

Mar 22 09:53 PM

[User 410655:]

So - how can one hedge against quantitative easing and the erosion of value of debt and savings ?
I personally buy farmland (Brazil, Paraguay) where I see most intrinsic value, or rather raw land (requires less attention then a farm) that has sufficient fertility to be farmland at some point and preferably below US$200/hectare
I like that it is so easy to understand how much there is and ever will be.

How do you hedge ?
John

May 09 11:49 AM