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Is Bernanke Loaded With Bullets Or Just Playing With A Cap Gun?

Ever since the Federal Reserve Bank Chairman Ben Bernanke talked about quantitative easing part two the markets have been in full rally mode. Now, while this rally has occurred on some of the worst volume I have ever seen the point move higher cannot be denied. Since the August 25th low the S&P 500 is higher by nearly 12.00 percent. Ironically, this is almost the same amount of downside that the U.S. Dollar Index has declined since it topped out on June 7th, 2010. Today the U.S. Dollar has made a fresh new multi-month low at $76.90. The plan is to simply drop the U.S. Dollar against most other currencies and inflate the stock markets around the world. Can this type of action actually work?

Ben Bernanke has said that he will do whatever is necessary to get the market up and the economy going. As far as quantitative easing goes it looks as if it has been going on already. Just look at a chart of gold and you will see that gold began taking off on July 28th, 2010. Since that time gold has risen higher by 17.00 percent. Gold is the new way of reading the M3 money supply that the Federal Reserve no longer makes known to the public because it does not fit into their budget, if you can believe that. In fact, all commodities have soared higher. You can't tell me that high oil is good for the economy. High oil is an automatic tax on the public.

The Federal Reserve is now the largest owner of U.S. Treasuries with the exception of China. Now it is well known that the U.S. has some serious debt service to pay. However, is this the way it is going to play out? The Fed will just continue to drive the interest rates lower so the U.S. will just have to pay less interest. Something will eventually have to give. The Chinese and other countries that hold U.S. debt will eventually get tired of this action and not want to purchase any new bonds. That means that the Fed will eventually own all the debt of the United States. Is this possible?

This really looks like a last ditch effort to inflate this economy back to health. The last time former Federal Reserve bank Chairman Alan Greenspan did this in 2002 it created the largest credit bubble that the world has ever seen. At that time the market and the economy was suffering from the tech bubble and a new housing bubble was formed to take its place. People from all walks of life rushed in to buy homes with little or no money down and a construction boom was formed. This time around, bank lending rates are at historic lows and people don't want to buy anything. Banks are selling more houses than home-builders. Foreclosed properties are growing by the minute. However, the central bank for the United States is looking to flood the system with more money.

This story cannot have a pretty ending. If a drug addict is just given more drugs he will eventually overdose or take a heart attack. Unfortunately, the stock market does not see it like that at the moment, however, it may be left no choice. Inflate, inflate, inflate, until it is too late. Deflation is much like a black hole. It will suck everything right in. Unless capitalism is allowed to resume and work the way it was designed to work by letting things fail this economy is doomed.

Nicholas Santiago
Chief Market Strategist