The Federal Reserve yesterday demonstrated to the world that its true agenda is to finance the federal deficit.
The $600 billion that Fed Chairman Ben Bernanke will print to buy government bonds is almost the same amount of Treasury debt the government will issue during the next six months.
The Fed is helping the government spend in an irresponsible way. With this new QE program, the Fed is taxing citizens all over the world in order to finance U.S. deficit spending. The taxing is done indirectly with a devalued dollar that causes higher commodity prices and inflation.
Low inflation, low interest rates, low job creation and low credit growth are just red herrings that Fed is using to justify its actions. The first QE failed to promote any of the above-mentioned factors.
Seeing that QE is fruitless to promote growth, some Fed members are now touting that their policies produce a “wealth effect” as stock prices go up. QE makes investors feel “richer” — and they will spend more money. This, in turn, will promote growth in the economy and job creation.
That statement is a complete falsehood.
Let’s look at the market right now.
At the moment, the S&P 500 is up 1.52 percent; oil up 1.87 percent; gold up 3.27 percent; copper up 2.91 percent; wheat up 2.95 percent; sugar up 5.24 percent; cotton up 3.27 percent and the dollar index down 0.72 percent.
What wealth effect is the Fed looking at? Bernanke says he sees no inflation. Maybe he should learn to read a chart.
There is no wealth effect in the stock market.
Stocks are going up much slower than commodities. And for 26 consecutive weeks, investors have pulled money out of the market.
The retail investor is mostly out of stocks and data suggest that they have missed the entire September and October rally. Retail investors aren’t benefiting from the supposed wealth effect.
Also, guess what will happen to the margins and earnings of most companies thanks to rising commodity prices? Certainly no wealth effect.
As margins tighten and profits diminish due to rising commodity prices, companies will have less money to hire people and will probably have to fire some employees. The already weak U.S. consumer will be squashed by high inflation that will allow him or her to spend even less in discretionary items.
For how long can the Fed keep up with this? I don't know how long it will take but the market will surely enforce discipline and sanity to the deficit-spending and monetary policy.
Someday, interest rates will start to skyrocket, as investors seek more yields to compensate a devalued currency. At that moment, the U.S. government will be in big trouble as the federal debt’s interest costs will become unbearable quickly, just like in Greece.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here
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