Next Stop: QE-3

June 1, 2011 Market Updates, Politics No Comments

Without a doubt, the next stop: QE-3. There is no question, after today’s economic numbers, that QE-3 is already in the works. The US economy will choke under higher interest rates and the housing market will crater, from where it is now, by 50% if interest rates rise. The Case Shiller Index shows the housing market slipping back into recession with a -3.6% shrinkage. The 10 year Treasury yield has declined steadily from 3.6% to just a touch over 3% in a little over a month. This is truly remarkable considering that the Fed’s $600 billion (which we just found out is more like$750 billion) USD purchase program is supposed to end sometime this month. Make no mistake about it, QE-3 is already underway!

What is Quantitative Easing?

When you boil it all down, QE is the government monetizing its debt in order to delay the inevitable day of reckoning that is coming for the fiat currency system. Qe-1 and QE-2, which were spawned by the credit crisis of early 2008 required the government to either purchase, underwrite or finance an enormous quantity of mortgage debt. This money was funneled into the “too big to fail” banks and mortgage companies while leaving the American homeowner holding the bag with a devalued currency and a house that was halved in value. “Hope and Change” in action. “We’re from the government and we are here to help you”. Run whenever you here those words!

What’s Next for QE!

Now that you have been bent over and the only real appreciation in property values is in Washington D.C., due to “The Community Organizer In Chief’s” shovel ready jobs for the U.S. Government, it is time to re-evaluate just where America is headed. America, under the current, left wing regime, can only monetize its debt. The USD’s role as a reserve currency is waning and the credit worthiness of the US is in question. QE-2 was not so much an exercise in reflationary monetary policy as an attempt at monetizing government debt. There is no end to this process at this point. Whether you call it QE-3, or some other name so as not to draw attention to it, it will come on line, if not now, shortly.

Since the credit crisis in 2008, the Federal Reserve has created over $2 trillion new dollars (translate that into new debt and devaluation) by its various programs. A lot of this money was spent on buying mortgage backed securities from banks at inflated prices. In the recent months, a large percentage of the money was lent directly to the US government.

PIMCO has stated, that since last summer, approximately 70% of newly issued US Treasury securities have been bought by the Federal Reserve! This is the government monetizing its debt through the Fed! This can only lead to dollar devaluation and set the stage for hyper-inflation.

Anyone who knows the history of “Helicopter Ben’s” philosophy will know that he will not stop dropping money from the Fed. When you consider that, foreign demand for US Treasury securities is waning and that China has been a net seller for four consecutive months, it is no surprise that the Fed has stepped in as the lender last resort. It would behoove Congress to actually look at the Fed and return monetary control to a body that can be removed when it “spirally indents” (for those that are verbally challenged, the word is screws) the citizen’s interest.

We are not currently off the cliff and on the way down. We are, however, very close. The following chart shows the state of the American currency. The USDX recently broke below an important support level and is currently headed towards a free-fall. It is also pretty clear, judging by today’s market action, the DJIA down 279.65, that the stock market knows where we are headed under this regime’s policies. The DJIA is telling us that it is time for a change because the dollar is headed into a free-fall.

Compare the USDX when it is overlaid on the Spot Gold Chart. It is pretty clear to see how the dollar’s direction directly affects the price of gold.

The chart tells it all. The U.S. Government is on the path to “Zimbabwe”. Hyper-inflation is virtually assured, unless “adults” quickly take over the reigns of power in the U.S. “Power corrupts and ultimate power corrupts ultimately”.

History has its own way of biting you in the butt. In an article published in 1966, Alan Greenspan (who later became the 2nd largest money printer in history, next to Ben “Obama” Bernanke) had this to say about deficit spending:

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

There is no question, gold is coming into its own, due to manipulation on government’s part i order to monetizing it’s debt. The U.S. government is like a crack addict. It just can’t stop spending.

Protect yourself with physical gold/silver and gold/silver miners, because the next stop: QE-3.

Till next time, good luck and good trading!