Quantitative Easing QE2, debt created out of thin air

… the crisis in banking has worsened … – Published on Global Researach.ca, by Bob Chapman, September 4, 2010 (see QE also on en.wikipedia).

In a futile attempt to keep the economic and financial system afloat, QE2 is underway. It began in early June as banks changed the rules for awarding loans. Their efforts over the past few months have only met with moderate success. Banks had cut back lending by some 25% over the past 16 months mainly to small and medium-sized companies. In the process the economy slowed down markedly and unemployment shot up to levels not seen since the 1930s. These first attempts to restart a sliding economy have so far not met with success. It was not long after that the real decision makers at the Fed that QE2 was going to be needed. We saw the marshalling of financial and economic forces and the tell tale sign of a stock market moving upward for unexplained reasons. That tipped us to QE2. 

This interventionism effective for the short term will again on the long-term drive out real investment. The kind that creates jobs and profits, that does not directly reflect the financial system. The policies being put in place by the Fed are the antithesis of a free market not only because they interfere with a natural process, but also because they are borne of debt created out of thin air – debt that will have to be repaid by the taxpayer. Much of the funding being created by the Fed will and has been used to fund the debts of the Treasury and government agencies, which produce nothing but more debt. In this process they also crowd out other borrowers of money, which ultimately leads to higher interest rates and offsets banks’ ability to lend. We are currently seeing a perceived flight to quality into US Treasuries from the market and from corporations. The perception that government’s cannot go broke, particularly the US government, is pure fantasy. The profligacy of debt has to be paid by citizens. That takes purchasing power out of the hands of the consumer, which in turn pushes the economy deeper into depression … //

… The former transaction tax, we are told by our people in Washington, will rise to 3% within three years. This is the worst possible thing that can happen to the economy. Congress is almost totally purchased, so we see little resistance to passage, prior to the end of the year. The elitists are about to bury the economy. The President has been in office 19 months and Treasury has increased debt by $2.74 trillion, or by $144 billion a month. Freddie Mac had a quarterly loss of $6 billion and wants $1.8 billion more in taxpayer aid. You are seeing the nationalization of housing, as we saw in the Soviet Union, as we predicted seven years ago.

The Fed tells us they will not create new money and credit to fund QE2. We do not believe that for one second. They also stated they will use the proceeds from maturing mortgages they bought from GSEs, but they will sell MBS and CDOs to fund the operation. As of now we do not really know what those numbers are, but we do know that the banks that sold them to the Fed are gearing up to buy them back. We can promise you the Fed has every intention of using any avenue to fund QE if necessary. Either that or they pull the plug and go into a deflationary depression. Those within the markets are confused and disappointed because they do not know which way the Fed is headed. That is why markets are so volatile along with the brazen in your face market manipulation by the “Plunge Protection Team.” That is why so many investors have headed for the exist … //

… Again, the Fed either monetizes via QE2 or the financial system collapses. There is no real recovery so the only alterative is to create money and credit. The liquidity trap the banks are in certainly neutralizes their ability to assist in keeping the economy above water. There is no safety in US Treasuries, as investors flock to them and their ridiculous yields. At the same time central banks worldwide are buying US Treasuries to bolster the US financial system. They do not have much choice, because they are already buried in US dollar denominated paper. Although their dollar forex position has fallen from 64.5% in US dollar investments, 18 months ago to 69.5% recently. All the players know the US either monetizes or dies. That was reflected in the stock market in July when the Dow moved up almost 10%, only to be thrown back by reality. It was in early July we predicted QE2 was on the way. That wasn’t difficult when we saw all the big time players going long. It was the same M.O. we saw starting last October when the biggies started going long dollars and short the euro. They knew something we didn’t know, because in both instances they created the plan for the fall in the euro and well as this summer stock rally. Nothing has changed, even under dire circumstances. They believe they are bullet proof and can do anything they want. There will come a time when their reign will end and the outcome will be devastating. (full long text).

Global Research articles by Bob Chapman.

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