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QE2 Risks

There has been an immense amount of material written with regard to QE2 (additional Quantitative Easing).  Most people seem to be of the belief that while it probably won't be of much benefit to the economy, it doesn't carry much risk, either.  

My analysis of the situation indicates that there is an array of risks. 

Two risk facets of particular concern are a greater-than-anticipated risk to the U.S. Dollar (i.e. a substantial, rapid Dollar decline), as well as risk accompanying the Fed's ballooning portfolio.

On Monday, a Reuters article said "The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund said..." 

This expectation of a gradual U.S. Dollar decline seems widely-held.  Is it realistic?  Some recent technical analysis work seems to indicate that a larger-than-expected Dollar decline is likely. 

As well, in the past few months I have written various posts of why, from a fundamental perspective, the Dollar is highly vulnerable.

While a falling Dollar has some benefits, it also carries much adverse consequences, many of which lack recognition.  These adverse consequences are only magnified as the Dollar falls lower.

The other risk, those caused by the Fed's ballooning portfolio, is of great importance.  This is a very complex potential risk, entailing both large potential capital losses as well as other associated unintended (negative) consequences.  The capital losses aspect is well-documented in a Wall Street Journal editorial of today titled "High Rollers at the Fed." 

Both of these risks, as well as the many others, will only grow in importance if, as I suspect, additional (over and above today's $600B announcement) large QE is performed in the future.


Disclosure: no securities mentioned