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Jasper M
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Retired, 48, been making my own financial decision since I was 17. Every day, for the rest of my life, I will be a recovering Merrill Lynch customer. Proudest Financial Moments: Personal Best return on equity: 20/1, Leap Puts on Citi & GE, closed in late 2008 Personal best adjusted for... More
  • Why I hold that QE2 (wretched notion that it is) is not significantly inflationary 0 comments
    Nov 11, 2010 2:02 AM | about stocks: AMBC, MBI, JPM, MET, PRU, BRK, MS
          Now, there's headline guaranteed to annoy many or most with any firm opinions on the topic. But I hold it to be just common sense. 

         First of all, all that new from-thin-air credit the Fed is creating is mostly going nowhere. Money velocity is very low just now. Most of it is going to sit on the balance sheets of terrified financial institutions, who are mostly very much aware that they continue to exist only by the grace of Mark to Unicorn. Potential consumers will not get their hands on it, so, by and large, it will not be presented to compete for goods and services. 
          Much has been made of run ups in financial assets since (or even in anticipation of) the announcement. Especially commodities: It is held that rises in various futures contracts, fueled by the prospect of easy money, will inescapably translate into rises in the retail price of these things.
         It seem to me a quick flip through the history books will show you that this is not the case. Ask Boone Pickens how it worked out for him. 
          But that, put plainly, is actually a secondary issue. The main reason QE2 will not be inflationary is simply because it isn't big enough!

         Now, hold on a moment, before you pigeon-hole me as a Krugmanista. I think the entire notion of Quantitative Easing as a beneficial therapy is ludicrous. Failures should fail, and artificially inflated prices should fall.
        What I am saying is that the Fed's current plan cannot succeed, simply because the forces of capital destruction, already in motion, are demonstrably notably larger. 

          Qe 2 is rated at 600 billion. But the initial market collapse of this depression, from 2007 to early 2009, is estimated to have wiped away about a t-t-t-TRiLlion dollars of assets. Once that next pulse of that decline begins (an inevitable and inescapable event, the logical consequence of recent history), the damage will likely be even more severe. 
       So we have the Fed promising to create $600 billion dollars between now and June . . . and Mr. Market's clear capacity to wipe out more than that, and leave the table hungry. It's not quite Little Bighorn, but the odds on winner is pretty clear to me. 
        Let me list a few possible sources for failure snowballs to start in this planet's incestuous financial community.
        1) Ambac is toast; MBIA to follow. How far behind are notable sections of the portfolios of MET, PRU, BRK, et al. ?
         2) As Zero Hedge reminds us, S&P got served a Wells Notice a while back. Some thing could come of that any moment. 
         3) JPM and accomplices apparently caught red handed manipulated silver. 
         4) According to Reggie Middleton, if less than 1% of the counterparties of MS derivatives exposure fail, it will wipe out their capital . . . which will kill the other big banks, as they are all holding each other's crap. 
         5) Fraudclosuregate. Open ended liabilities, screeching halt in clearing housing overhang. 
         6) Probability that newly elected Republican congressmen, with more principles than experience, will not play ball. 

     And that's just the domestic stuff! Tack on Europe (pick a PIG, any pig . . . ), the imminent collapse of China . . . Once false move, anywhere, by anyone, and   Ha-Yuge amounts of capital are going to vanish. $600 billion won't do it.

        And thank goodness. 
        Our times have featured a nigh unprecedented use of government power to try and paper over (nearly literally!) the manifest failure of bad theories. The defense of applied Keynsianism has been nearly as intellectually committed as the defense of Marxism by the last set of losers.
         Fortunately, there is every sign that the days of the current primary platform for force projection by the defenders of the current nonsense are numbered. The Federal Reserve will be leashed, muzzled . . .  and done away with.  Its disestablishment will be the lasting legacy of Chairman Ben Shalom Bernanke. 

        This is what happens when you let Authority trump Truth. Thomas Jefferson gave us the notion of "The marketplace of Ideas". We have strayed far from that ideal. We Will pay for that; I hope we Learn from the example. 

    Disclosure: short PRU, and the euro. Long $US
    Stocks: AMBC, MBI, JPM, MET, PRU, BRK, MS
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