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What Radical Measures to Expect in the Post-QE Era

By this time next year, central banks will be out of bullets
Wednesday, August 1, 2012, 9:37 AM
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Executive Summary

  • Expect the 'benefits' of QE 3 to be short-lived (<9 months)
  • Expect more radical solutions to be rolled out by Capitol Hill (not the Federal Reserve) within 90 days after QE 3, including:
    • Infrastructure build-out on a massive scale
    • Military resource redeployment to civilian projects
    • Debt jubilees
    • Tax holidays
  • A weaker dollar will be pursued
  • Capitalism will be compromised for populist gain

If you have not yet read Part I: When Quantitative Easing Finally Fails, available free to all readers, please click here to read it first.

Had every US homeowner with a mortgage also held 100 ounces of gold through the rise and fall of the housing bubble, the balance sheet of US homeowners would already be repaired. Gold has at least tripled, if not quadrupled, through that time period.

We state this to illustrate a point. Quantitative easing (QE) and other reflationary policies benefit gold, global growth outside the United States, and the earnings of corporations -- not US workers.

QE largely benefits the continued dollarization of the world, as the dollar has now fully joined the yen as a cheap funding currency. But QE does not improve wages and does not help the private sector deleverage. Indeed, despite the amount of deleveraging that has occurred in the private sector, the asset side of the private sector’s balance sheet has fallen. To put this in plainer terms, Americans have indeed been paying down their credit cards and mortgages. The problem is that their assets, primarily homes and other investments, have concurrently fallen in value. (The Federal Reserve’s Z1 Report is pretty clear in this regard; see the B.100 Table on page 120 of the 7 June, 2012 FED Flow of Funds PDF).

This lack of progress will eventually express itself in a kind of exhaustion. Either America is going to have to accept much lower levels of consumption and permanently low levels of labor participation, or the country will have to explore more innovative ways to shock its economy back to life.

Let’s take a look at a few of these possibilities:

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