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Great Depression Online Archive Issue:

What Happens When QE2 Doesn't Work

Great Depression Online
Long Beach, CA
November 02, 2010

Inside This Issue You Will Discover…

*** The Collective Wisdom of Individual Ignorance
*** Policies of Mass Inflation
*** What Happens When QE2 Doesn’t Work
*** And More

The Collective Wisdom of Individual Ignorance

Not since John Edwards’ paternity admission has there been a week with brighter prospects for droll entertainment.  Here at the GDO we’re not taking any chances of losing our sight.  We gawp with our sunglasses on to protect our wide-open eyes from the blinding comedy scheduled to flash before us.

What could be more hilarious than a nasty mid-term election and a Federal Reserve set to announce its next scheme to destroy the currency?

Alone each of these would be quite a hoot…but together they should offer up a remarkable side splitter.  We look on with anticipation.

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By tonight we should know if imbeciles like Barney Frank, Harry Reid, and Barbara Boxer have been given the boot.  We’ll learn if California’s high office has been turned over to a retread from the 1970s.  And we’ll find out if our city will tax smot pokers.

Not that we think we know the best outcome of any of these.  But after our recent stint at jury duty, and the opportunity to observe a broad cross section of our peers, we positively agree with H.L. Mencken that, “Democracy is a pathetic belief in the collective wisdom of individual ignorance.”  How else can one explain the President?

Still, as if the elections weren’t enough, come Wednesday, Ben Bernanke and his cohorts at the Federal Reserve will announce what “nonconventional tools” they’ll use next to carry out their policies of mass inflation…

Policies of Mass Inflation

We’ve been through this so many times we hardly know where to start.  Nonetheless, we can’t stop talking about it; for we’re in shock and awe of the lunatics manning the monetary levers.

What we are talking about specifically is what the Federal Reserve calls ‘quantitative easing.’  The name in itself is pure fed speak…it’s meant to deceive the public of what it really is.  Author and publisher Gary North recently said the first time he heard the phrase ‘quantitative easing’ he had a mental image of a man suffering from an extreme case of diarrhea.

Plain and simple quantitative easing is monetary inflation.

To really understand what quantitative easing is, one must begin with one basic question: Where does the Federal Reserve’s money come from?

The answer, alas, is so crude and rudimentary it pains an honest man’s brain.  For the Federal Reserve doesn’t produce anything tangible to obtain its money.  It just makes a notation in its ledger and – out of thin air – magically has money to remake the world in its image.  The Federal Reserve then either lends this funny money to the U.S. Government by purchasing Treasuries or it lends to commercial banks which then, in turn, buy Treasuries.

In late 2008 and early 2009, Federal Reserve Chairman Ben Bernanke created $1 trillion dollars and ‘injected’ it into the banking system.  This has now come to be known as QE1.  For several weeks it has been expected that QE2 will be announced at the next Federal Open Market Committee Meeting.  That meeting’s tomorrow…and following it we’ll learn what policy of mass inflation’s next…

What Happens When QE2 Doesn’t Work

“After weeks of speculation, Wednesday’s Federal Reserve open market committee meeting is expected to deliver details of a second round of quantitative easing,” remarks Neil Dennis for the Financial Times.  “In recent days, estimates of the probable scale of so-called QE2 have been pared back following international discussions on the impact of central bank market actions on global currencies.”

“Rather than a huge programme of asset purchases all announced up front,” adds Robin Harding, also for the Financial Times, “the Fed has made clear that it wants QE2 to evolve in size depending on the economic data.  But it is still likely to make a downpayment by pledging at least some asset purchases on Wednesday: $500bn is a likely figure for this initial round of buying.

“The Fed has put intense effort into judging what it should signal and how.  The FOMC has at least three broad options. First, it could be neutral, pledging to adjust the size of QE2 depending on the data.  Second, it could signal a clear bias towards continuing to buy assets unless the economic data have improved.  Third, it could pledge to keep buying assets until it is on track to achieve its inflation objective.

“Option three is the strongest because it gives an open-ended commitment to keep expanding the size of QE2 until the economy improves.”

In other words, when QE2 doesn’t work, they’ll try QE3, QE4…  Sometime between QE4 and QE5 – when Bernanke drops money from helicopters – the world’s monetary system will meltdown.  After that things will really go haywire.


M.N. Gordon
Great Depression Online

P.S.  As the Fed destroys the dollar, bond yields will eventually go through the roof.  That’s when bond investors will get creamed.  Our friend Bob Prechter recently released a must-read report titled The Next Major Disaster Developing for Bond Holders.

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