QE2 - An alternate scenario

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osb272646's picture
osb272646
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QE2 - An alternate scenario

I, like many people, have been struggling to understand the game plan behind the Fed's QE2 efforts.  On the surface, the effort seems to be aimed at creating a real interest rate below zero by increasing inflation while holding interest rates near zero.  This creates a cost to savings as inflation eats up more value than we receive in interest payments.  Borrowers will benefit because they pay back cheaper money than the borrowed.  The implications to the inflation rates, costs of commodities, and eventually our standard of living are significant. 

Being a saver,  I do not like this attack on my standard of living.  I view it as another giveaway to the profligate, not unlike the bailouts for the banksters.  I could see no gain from this game, and wondered just what the Fed and Treasury are accomplishing by seemingly trying to weaken our currency.

This is how I felt, until recently, when I noticed that China (among others) is becoming much more vociferous and antagonistic toward the United States and it's QE2.   China, the king of currency manipulators is complaining about Bernanke's QE2?  That's outrageous!  China has pegged it's currency to the US Dollar in such a way as to give itself huge advantages in its cost structures and international competitiveness.  The US has been trying to get China to revalue it's currency for years, but to no avail.  In the meantime, manufacturing has vacated our economy and gone to China.  The peg is the lynchpin in China's strategy to build up it's economy at our expense.

It dawned on me that perhaps QE2 is an effort by the US to break the peg, once and for all.  Yes, it presents downsides of significant proportion for the American Economy, in terms of weaker dollar, inflation, higher commodities, etc.  But, after years of being subjected to a "beggar thy neighbor" export policy by China, we have no choice but to take drastic action to break the peg.  All the blathering by the Fed and Treasury about economic recovery is a smokescreen for this very important strategic effort.  They can't come right out and say what they're doing, but since the Chinese will not voluntarily abandon their strategy of undervaluing their currency,  since the United States and the world, for that matter, are running out of patience in dealing with China and their currency manipulation, perhaps we are now embarking on an effort to adjust the exchange rate by engaging in a currency war with China, under the moniker QE2.

It is a game of who can dive the deepest and who can hold their breath the longest.  We get inflation in commodities, but so does China.  If they're truly undervaluing their currency, which I firmly believe they are, then China's economy will suffer worse commodity inflation than we do.  Who will cave first in this "break the peg" war?   

If my alternate scenario holds water, aren't we aiding and abetting the enemy when we get on the internet blogs and group - think about QE2 and disparage our leaders who are trying to fix a very serious problem facing our economy?  When 19 of the G20 countries gang up on the U.S., and the leader of the 19 other countries is China, shouldn't we step back and re-think what is really going on here?

 

 

 

 

 

 

 

 

 

 

doorwarrior's picture
doorwarrior
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Re: QE2 - An alternate scenario

Assuming your are correct you are saying that TPTB are willing to totaly destroy our economy, impoverish 98% of the  U.S. citizens and wreak havoc in global markets JUST to spite China. I think what they are doing will break the peg but thats not the reason for doing it. They are doing it because nobody else wants to buy our debt and the fed has  to or we default now instead of a year or two from now. They are just trying to kick the can a little farther down the road.

nickbert's picture
nickbert
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Re: QE2 - An alternate scenario
osb272646 wrote:

If my alternate scenario holds water, aren't we aiding and abetting the enemy when we get on the internet blogs and group - think about QE2 and disparage our leaders who are trying to fix a very serious problem facing our economy?  When 19 of the G20 countries gang up on the U.S., and the leader of the 19 other countries is China, shouldn't we step back and re-think what is really going on here?

That only holds true if you think of China and other countries keeping pegs on the dollar as "enemies".  The us vs them mindset is too simplistic and perhaps a little dangerous.  We have some substantial competing interests to be sure, but that isn't always the same thing as being enemies.  Besides, keeping currencies artificially low carries long term problems of its own.  "TANSTAAFL" (There Ain't No Such Thing As A Free Lunch)

IMO it's much more likely that our leaders' primary motivation is to avoid accountability for their screwups and selfishness and continue kicking the can down the road a little more longer.  And even if they really have our best interests at heart as in the scenario you describe, their cure is likely worse than the problem and a recipe for greater disaster.  You know how that old line goes... something about a road to hell and good intentions.  But really, the intent is largely secondary anyhow.  What matters most to me is that their actions have great potential to supremely screw up the country and my family's future.  It would be very little consolation that they might have meant well instead of being selfish or greedy.  We're still hosed in either case.

- Nickbert

aggrivated's picture
aggrivated
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Posts: 527
Re: QE2 - An alternate scenario

Read "The Alpha Strategy"by Pugsley. The cost of savings in inflation is only true if you keep your assets in the monetary form.  Put your assets in another form that appreciates along with inflation.  Put the inflation on your side, not against you.

Bradford's picture
Bradford
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Posts: 20
Re: QE2 - An alternate scenario
James J Puplava talks with George Karahalios on Macro Matters...
My notes from the interview:
  • There are no free markets and there is no free trade.
  • No deficit reduction will be forthcoming.
  • In the interventionary model, market forces compete against interventionist forces (money printing, interest rate suppression, currency manipulation, capital controls).
  • Imbalances that were at first accepted with international cooperation, couldn't be sustained by market forces.
  • Even if a country did not initially peg, it was forced to play the game or lose its' competitiveness (implication for its' exports and internal pressure from its' political cycles)
  • This paradigm shift means intervention will be taking place on a regular basis.
  • As the Fed inflates, China will refuse to un-peg, and will inflate in unison (until they find diminishing returns from using this strategy)
  • The Western world has a work force that is no longer competitive in the global market. It is overleveraged and in need of liquidity to prop up it's economy.
  • The Fed wants an orderly decline of the dollar: it will remain wishy-washy between printing and non-printing.
  • How long can an economy that's based on intervention persist?
  • Expect huge budget deficits, stimulus, tax cuts, QE3, QE4, etc.
  • It's a gold bugs delight!
NJrefugee's picture
NJrefugee
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Posts: 8
Re: QE2 - An alternate scenario

This is a good summary of the potential motivations for and consequences of QE2.  (It all looks pretty bad, so don't read this at bedtime.)

 

http://www.americanthinker.com/2010/11/bernankes_cowardice_has_sealed.html

 

 

osb272646's picture
osb272646
Status: Silver Member (Offline)
Joined: Mar 14 2010
Posts: 120
Re: QE2 - An alternate scenario

Interesting replies.  This subject sort of feeds into the inflation/deflation debate.

Group think can be a dangerous thing.  I learned a long time ago to consider carefully opposing views.  That makes it much more difficult to arrive at a decision, but more than once, it has keep me from driving over the cliff.

The general thesis of my original post appears to be emerging.  Hopefully we'll all be around to see what comes out of this.  If you have the inclination, take a look at these articles:

http://seekingalpha.com/article/239007-how-china-s-inflation-policy-will-help-the-yuan-dollar-exchange-rate?source=article_sb_picks_1

http://seekingalpha.com/article/238624-the-damaging-effect-of-emerging-market-monopoly-money-on-common-stock-investing?v=1290995548&source=tracking_notify

 

osb272646's picture
osb272646
Status: Silver Member (Offline)
Joined: Mar 14 2010
Posts: 120
Re: QE2 - An alternate scenario

The story is unfolding.  What seems to be on the surface is not always so.

http://seekingalpha.com/article/242175-cpi-indicating-a-market-turning-point-is-at-hand?source=article_sb_stocks_1

I bought the TBT and the PST when QE2 started.  So far so good.

 

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