US Fed propping up stock market; QE2 will fail as it should

flushing money down the toilet

flushing money down the toilet

“”The Fed’s best hope seems to be trying to convince investors that short term interest rates are going to remain lower for longer than they currently expect or that inflation is going to be higher. The most likely outcome is that the Fed will buy $500 billion of Treasury securities over the next six months and make those purchases conditional on how inflation and the unemployment rate evolve,” economists said.”

The Fed Reserve Chairman et al in the FOMC meetings hinted at a possible repurchase of US bonds/treasury bills (treasury issued securities used to raise funds for fiscal policy). Thus what is hinted at is: there is an issuance of treasury debt, and to bring the fed funds rate down (a rate charged to banks for holding deposits at the Fed reserve), the Fed reserve is to buy these securities to make the surplus bonds on the market smaller in size, thus driving down the Fed funds rate, and thus influences the prime rate (the rate at which prime lenders are borrowing at)..

How ironic that the major holders of US treasuries such as:

1. China, 2. Japan. 3. Korea 4.and the Middle East are lending the US money at a high rate of interest to finance their burgeoning debt load… China has announced that they are to wean their purchase of US treasuries at a time when it is needed most.. So in essence, it can be seen as the using Chinese et al.. borrowed money to stimulate the US economy, and what will be the net outcome? MORE GOV’T DEBT

There is one profound flaw with the idea of spending your way out of debt. No government will want to be the one in power at the time the debt has to be paid down, because they know it will be an election issue. Therefore, all that will happen is each successive government will keep pushing the deficit forward. It may avoid a prolonged recession or even a depression, but it still robs the future of funding. So the debt is spread over twenty years, that’s still twenty years of debt reduction that could have been avoided, had the developed nations not grossly overspent to begin with.

Another profound flaw with the world economy right now is the idea that Germany will be okay if it can sell to China. China will be okay as long as it keeps the yuan down and exports up. But the US needs China to devalue the yuan in order to increase its own exports. China needs to sell to the US and needs to buy from Canada. Australia depends on China for exports, and on and on and on. Back in the 1930’s the world economic system was more simple. Today it is mega complicated. You can push this up, but that goes down, so you push over here, and something drops over there. It’s like there are sixteen holes in the dyke and you only have ten fingers and a nose.

The Fed and “Plunge Protection Team”: Are They Manipulating Stocks?

If you think back to that time, you may remember that the Federal Reserve and U.S. government took many aggressive steps to help stop the collapse. Every time they would announce a new intervention, the market would cheer. Result? Prechter’s chart gives an unequivocal answer:

slope of hope

As you can see, announcements of bailouts, unlimited credit, bans on short sales, etc., were powerless against the biggest stock market collapse in 76 years. The DJIA kept sliding. It didn’t stop until March 6, 2009 — after it had slipped below 6,500.

So: Is the Fed and the “Plunge Protection Team” engaged in market manipulation? You can browse EWI’s Message Board for some answers, but one thing is clear: When stocks were crashing two years ago, few dared to suggest that the Fed was in the saddle. Bob Prechter puts it best:

“When markets go up, the Fed seems to be in control; when they go down, it seems out of control. But the control aspect is an illusion.”

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QE2 could possibly be meaningless: Capital Economics By Amulya Nagaraj

The U.S. Federal Reserve might announce another round of quantitative easing (QE) on Wednesday, but the it might not actually make a difference, Capital Economics said in a note.

“The most likely outcome is that the Fed will buy $500 billion of Treasury securities over the next six months and make those purchases conditional on how inflation and the unemployment rate evolve,” economists said.

However, this might not actually be as effective given that the fiscal stimulus is waning, the boost from inventories is also fading and pent up investment demand is slowing, the research firm added.

Markets have been boosted by the news about a second round of easing. However, the dollar has been falling against other currencies on the news that there would be more greenbacks floating in the market.

As the effect of the fiscal stimulus fades, the economic growth has slowed. While this made a second round of stimulus inevitable, it is easy to see how the QE2 would give way to more such stimulus, Capital Economics said.

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