QE2

The second (although it is more like a 100th) round of so called "quantitative easing" has been what has driven the equity, bond, and commodity markets to new highs. Even the rise in gold is partially due to the prospect of another round of money printing. Quantitative easing is a fancy name aimed at fooling the public into thinking that there is something scientific about the things the Fed is doing. It is nothing different than printing an obscene amount of new paper money and buying bonds or other financial assets with that in trying to support certain interest groups such as the banks and rich money managers that are politically and monetarily connected to the Fed and the government. It is done in an unsterilized way in order to increase the money supply even further. The argument behind this strategy is the belief of the monetarists that increased money supply increases economic activity. This is partially supposed to be achieved through the lowering of borrowing costs by lowering the yields on treasury bonds so that businesses and individuals find it easier to borrow and invest.

This is all good and dandy in theory, but in practice it is hogwash. For one thing, rates are already very low and another 50bps to 1% is not going to start an investment boom. Corporations are flush with cash, so they do not need to borrow to invest. They are not investing because they do not have nay reason to increase production as the demand side of the economy is in trouble. It is the consumers that is facing close to 20% unemployment in an economy that is 70% consumer spending that is the issue. The problem is falling wages and declining living standards due to the inflation faced by the middle and lower classes through higher food and energy prices that is the problem. It s the increasing inequality between the ultra-rich that is getting richer through the operations of the Fed and the middle and lower classes that are sinking lower again because of the fraudulent practices of again the Fed. Fed is making the problem worse by increasing the inflation different groups of the society face. Asset prices coming down due to mispricings caused by the ultra-supportive Fed policies of the past is not deflation. It is a process where fair value is achieved after so much distortion caused by the Fed in what should be a free market economy. Fed officials themselves admit they are distorting prices when they say things like "we are supporting American families by increasing asset prices that would otherwise be lower". What kind of logic is that? Besides they are only helping the financial asset rich upper-classes who do not spend their extra income. It is the middle class that is the wheels of an economy and that class is being butchered by the Fed.

The markets are setting up a lot of disappointment down the road as the economy will fail to register any employment growth through more QE.