Everyone is waiting to hear what the Federal Reserve has to say regarding the highly anticipated quantitative easing program known as QE-2. Will the Federal Reserve do a $1 trillion program or perhaps more? Everyone that is involved in the day to day trading and investing community has their eyes and ears pinned to every word that the Federal Reserve Bank Chairman Ben Bernanke will utter. However, will it really matter what he says or does?
Right now he has told the world that he is trying to cause inflation in order to fight deflation. While this sounds somewhat bizarre, this is what they are trying to do. What happens if this move by the QE-2 action by the Federal Reserve fails? Well, then there is quantitative easing three (QE-3). These guys will simply do more of the same. Does anyone realize that the taxpayer has to pay this money back with interest? This is what the high price in gold has been telling us since gold began to take off in 2001. Gold has been in a bull market for nearly 10 years now and still remains very strong. The action in gold has told us that regardless of what problems the country or the world face, inflation is the answer by the central banks.
Japan has been fighting deflation for over twenty years. The Nikkei Index topped out in 2008 at nearly 40,000. Today that index is trading at just over 9,000. This is what happens in deflationary markets. Many people argue that Japan should have inflated their stock market sooner and they would not have had a stock market that has gone nowhere for twenty years. This is one of the most ridiculous statements that I have ever heard. When you inflate the stock market artificially you create asset bubbles. Just look at what Alan Greenspan and the Federal Reserve Bank did in 2002 -2007. They created the greatest credit and housing bubble since the Great Depression. This was done by simply lowering the Fed funds rate (overnight bank lending rate) to 1.0 percent.
This time around the current Federal Reserve Bank Chairman Ben Bernanke has had the the Fed funds rate at zero percent since December 2008 and he has been buying U.S. Treasuries and mortgage back securities at an alarming rate. One can only wonder what the next bubble will look like when it pops. It will certainly not be pretty.
When will the people in charge admit that the world cannot continue to inflate their way out of every crisis? Inflation can be fought off by raising interest rates and firming up the currency. However, deflation does not have such a simple cure. There have been very few economies that have ever fixed the problem of deflation. As far as I know there is only one answer for deflation and that is failure. Simply allow the institutions that are bust to go bankrupt and fail. That is the answer. The powers that be must allow capitalism to work as it was intended and designed to function. Bailouts will simply not do the trick. Remember the more money that is printed and created, the more diluted it becomes. Will someone please pass this message to the Fed Chairman.