Thursday, May 5, 2011

The money supply and Quantitative Easing - an uncontrolled Nuclear Meltdown

Quantitative Easing according to the fed is a panacea. It works every time and does exactly what it was long as you are allowed to adjust your stated intentions, on the record and post history, as Mr. BURNanke is allowed to do. But lets take a closer look at what is going on as the QE program implodes in a nuclear fashion.

QE was designed or one a way to give banks and interested parties more money to use to inflate their mark-to-market assets as they reflected on their balance sheets. I think you can easily rest assured that if I gave someone $100,000, which I would need back at some point, and instructed them to invest it - most would much prefer to put into some sort of stock, commodity or other easily liquifiable instrument rather than starting or funding a business which requires real commitment and non-rented money. Its no different in this case, the big banks and dealers like JP Morgan used the program to buy up 70% of the entire copper market and GoldmanTax used it manipulate nearly every market that they touched with a flood of rented liquidity. In the process, third world countries, oppressive regimes who thrive by stealing from their constituents in even more incredible ways than the Central Banking Cartel and the Western Governments have...were unable to manage citizens who could not afford to eat. These are direct effects of crazy central planning policies that are designed only to prop up the culprits of malinvestment and financial malfeasance. Burnanke can say whatever he wants, but when the fed went to study foreclosure efficacy and documentation, the could not find ONE, not a single one, case that was improper and that he did not like...and we expect the FED to be able to identify inflation or risks that I setforth in this post...Their credibility is ZERO...and BURNanke should be charged.

Now lets look at what has been occurring...and the money process. The fed gives new cash to institutions via QE, they leverage it up 10x to 20x in their derivatives trades and then the exchanges raise the margin requirements so that all that rented cash now simply disappears. Perhaps that puts into perspective why bankers and officials prefer a non-regulated derivative markets where deals can be struck without objective parameters and risk management - the whole thing is based on accounting control fraud - a leveraged banker's best friend. There are two side effects going on here...
  1. The process is duplicitous and ends up dragging in people stressed by the economic ecosystem and think they desperately need to try to prevent what they see as an impending total personal catastrophe...
  2. Amature speculators who get killed playing the last part of the charade thinking they can get rich on others misfortune
In our case, 2 trillion dollars has been created by the FED recently...nearly a trillion of losses will likely be materializing near-to-mid-term in commodities speculation rife markets. More money will be destroyed by even tighter margin and credit policy by brokerages and FCM's through out the system and other markets. So, the pressure on all inflationary assets will increase and available liquidity will decrease. The one thing to keep in mind is that liquidity shortages effect both longs and shorts because traders on both sides of transactions have the capability to use leverage. Therefore, the sideeffect will be more volatility and deceptive volatility at that...up moves will be powerful, however, the downs moves will likely be even more powerful. The fed will have accomplished the feat of creating 2 trillion dollars that not only vanish entirely (as I indicated in quite a few posts last year)...but then subsequently turn into a deficit of 1 trillion or more. The fact that the new 2 trillion that the Fed recently created simply offset money destruction in real-estate, the economy as a whole and other credit instruments is not taken into account. Certainly the Fed will not take it into account and will seek to obfuscate their failures once more. Right now we are looking at the potential results of Fed money creation efforts in this case resulting in a net destruction of money to the tune of 5 trillion dollars over the last 8 months and into the near future if their 2 trillion turns into zero as the probabilities suggest it will. This of course does not include money destruction from the US debt debacle...the great money collapse scenario, if it plays out, will be clearly visible in the dollar which will rally to 30 year highs against most other currencies in my opinion. It will also be visible in the markets where a short of cash will be unable to drive asset prices higher - just as has happened in real-estate. It will be visible in the jobs markets where the effects of disasterous central planning and government policy will constrain the real economy and job engine.
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