Quantitative Easing (QE) 2.0 Will Happen

According to the NY Times, since the summer, Fed officials have grown increasingly worried that the United States could slip into deflation, a decrease in prices of the kind that has bedeviled Japan since the late 1990s. The Federal Reserve has been talking about printing more money (QE) to battle "deflation". The claim of deflation is a bunch of propaganda. The stock market, food and energy, and commodities markets are all showing the inflation of QE round one.

QE 2.0 will happen, the question is when and at what cost? Maybe the Federal Reserve is waiting for a stock market crash, to start printing money. Maybe they are waiting for some strength in the US dollar, before devaluing it some more. Maybe they are waiting for a certain yield in the long and/or short term treasuries before they act. Maybe they are waiting for all asset classes to drop sharply, like what happened in 2008. Maybe they have a set date regardless of market conditions, who knows?

There are many possibilities, but one thing is for certain. There will be a QE 2.0, and as a result there will be additional inflation, and there will be lower interest rates.

Inflation Crash Course by Dr. Martenson

History Lesson from Niall Ferguson

A couple of months ago, Niall Ferguson was asked to speak at the Ninth Annual Niarchos Lecture. Niall Ferguson is a famous historian from Harvard. He has written many books like the following: The Cash Nexus, War of the World, and The Ascent of Money: A Financial History of the World. When he speaks people listen; here are some of the points of interest from his speech (most bullet points taken directly word-for-word from Niall himself):

• There is a suddenness to things when they go wrong in finance
• Canada is one country that is NOT involved with the extraordinary debt increase that most of the rest of the world is experiencing
• Crises of either war or internal politics (sometimes both), drove investors to sell bonds and therefore to drive up the yields on the bonds
• Exploding deficits to pay for the war and surging public debts caused an increase in risk in the eyes of investors
• It is striking the way in which very suddenly confidence can be lost in a country
• Ken Rogoff made the point that 90% debt-to-GDP is the threshold after which public debt tends to be associated with problems of low growth or high inflation, usually both (currently we are at 89% debt-to-GDP)
  
• Italy is much less vulnerable than Greece in the respect that most Italian debt, like most Japanese debt, is held by natives; it's not actually held by foreigners
• In the months ahead, look for debt default synonyms like repudiation, standstill, moratorium, restructuring, rescheduling, etc...Don't be fooled by the language, it still equates to debt default
  
• US treasuries are a safe haven the way Pearl Harbor was a safe haven in 1941; safe but not for much longer
• Favorite cartoon: Chinese sub threatens the US Navy. The Chinese submarine captain is says, "Turn around or we sell all our T-bills!"
• When you're spending more on your debt than on your army or your navy, it's all over as a great power
• It's not a thousand years that separates imperial zenith from imperial oblivion. It's really a very, very short ride from the top to the bottom
  

Preserve Your Wealth

Cash won't be King; buy and hold real assets like commodities, real estate, raw land, etc... In the near future (three years maybe sooner), you will be much more worried about preserving your wealth than making a huge profit. Here are some reasons why I think this way:

1. U.S. government expanded money supply from 500 billion in late 1990s to over 2 trillion in 2010
   
2. Warren Buffett stated “Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”
3. $45,000 today has the same purchasing power of $5,000 in 1950
4. $5,000 held from 1913 is worth about 5 cents today
5. US debt hits a record of 13 trillion
   

US Dollar Attacked At All Angles

Here is a summary of how the US dollar (USD) is being attacked:

• Obama Admin devaluing USD while claiming strong dollar policy

The Obama Admin's intentions are clear, they intend to devalue the dollar. They have printed enough money to increase the monetary base by over 100% in slightly over a year. Per the Telegraph UK, "America's monetary base was equal to 6% of national income, and now, after a little over a year of money printing, it's 12%". The motive is to boost US exports. More importantly we can lower the value of our huge amounts of foreign debt.

• Quantitative easing has no indication of slowing
  

The Fed Reserve continues to buy our debt with printed money, even though Ben Bernanke stated that he was going to be implementing an exit strategy to stop quantitative easing. Our government is still auctioning off record amounts of our debts across various time frames, like 1yr, 5yr, 7yr, and 10yr. The Fed Reserve still has to buy up debt on the 5yr, 7yr, and 10yr debt because there is not enough domestic and foreign demand for our debt anymore. There is still much more debt to sell (at record amounts), so I am betting that Ben Bernanke is lying to keep the USD afloat. Watch gold, silver, other commodities, and strong currencies for the indication of what the market believes.

• USD becoming popular carry trade

Since interest rates are almost at zero, investors are borrowing USD and investing in areas around the world with high interest rates i.e. Brazil with 8.75%, and Egypt with 8.25% interest rate. The carry trades are flooding the world with cheap dollars.

• Central banks dumping large amounts of USD

Global central banks are diversifying into commodities and foreign currency as a hedge against USD devaluation. According to Bloomberg, "foreign currency holdings increased by $413 billion last quarter, to $7.3 trillion". World leaders are acting on their threats to dump US dollars, and this might become more aggressive if USD value falls off a cliff.

• Tension with Chinese over Yuan and Hong Kong Dollar Peg to USD

Not only are the Chinese holding huge amounts of our debt that is being devalued, but their currencies are being devalued along with ours.

• Joseph Stiglitz's Thoughts

"A new global reserve system is needed after the global financial crisis exposed the U.S. dollar-based system as flawed and risky". "The current global reserve system is fraying. It's falling apart. The issue isn't whether we go to a new system. The question is do we do so in an orderly or disorderly way." Stiglitz's suggestion is going with a SDR via the IMF; with a basket of currencies as the world's reserve currency instead of the USD by itself.

Bernanke Is Right - Weak United States Dollar Not Going Anywhere

In a recent PBS interview, Bernanke stated that "a strong dollar will come when we have a strong economy". How do I understand this statement? A weak dollar is here, and it is going to be here for awhile until we can turn this economy around. A strong economy will attract foreign investors, and this is what we need in the United States for a strong dollar.

How has our economy been doing lately? According to the Bureau of Economic Analysis, "our Gross Domestic Product (GDP) has decreased by over five (5) percent in the first quarter of 2009". The United States unemployment rate per the Bureau of Labor Statistics is at about 10%, which is probably lower than it really is. What is made in this country anymore? Take a look at the product(s) you buy and find out where it is made. You might have a difficult time finding a product made in the good ole' US of A. According to BBC news, "nearly two million manufacturing jobs have been lost in the US in eighteen months".

There is hope though! If the US can lead the world in "green" innovations, maybe we can start producing our "green" goods and revitalize our manufacturing sector.