Tuesday, February 05, 2013

Quantitative Easing for Dummies. And Paul Krugman.

When asked to describe "quantitative easing" (or QE) to novice investors, Chris Martenson offers a simplified definition: a few clicks on a computer keyboard, and the Federal Reserve has (*poof*!) created billions of dollars with which to purchase Treasury debt and mortgage-backed securities.

His summary, however, should send chills down your spine.

...we are living through the largest and most outlandish monetary experiment ever conducted by humans upon themselves. These are extraordinary times, and no matter how many times the mainstream press tries to convince you that a rising stock market or a rebounding housing market implies that we are returning to healthy economic balance, don't fall for it.

The Fed is in uncharted territory, having created a monster it can no longer control. In the process, it is blowing new asset bubbles that are benefitting those with first access to the newly-printed money (banks and corporations) at the expense of savers, pensioners, and anyone exercising fiscal prudence. This, of course, is creating a vast and growing inequality between the top 1% and everyone else.

When this misadventure in monetary policy ends, as both math and history says it must, it will be messy, uncontrolled, and very painful for holders of just about every sort of finanical instrument out there (stocks, bonds, derivatives, etc). That's why understanding the root causes and risks of QE is so important, in order to identify the best shelters for protecting the purchasing power of your wealth through this transition...

Martenson has five key takeaways:

• Money-printing by the Fed has created new bubbles in certain asset classes, like stocks;

• Excess reserves on banks' balance sheets hold a significant risk of triggering "explosive inflation"

• The Fed may be powerless to stop the QE spigot without risk to the system

• The mathematics will trump political considerations: a correction will occur and, with it, "massive financial dislocation"

• Hard currency assets (like gold) will, in Martenson's view, help alleviate some of the risks.

The people have spoken! Hope! Change!

Hat tip: BadBlue Money.

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