Friday, March 11, 2011

Earthquakes, riots and the QE3

We'll have to watch reports of rising radiation levels near the Fukushima Nuclear plant. If this turns into a story it could make a terrible situation worse.

The Middle East seems to still be on edge, but Saudi Arabia's day of rage again seems to have fizzled and the news from Japan has pushed this to below the fold info today.

As I mentioned a couple of weeks ago, the stock market dipped for a day and people began clamoring for more Fed intervention through another round of quantitative easing (QE). The general consensus on Monday of this week was that the Fed would wind down QE 2 and let the market take care of itself by June. Well, two or three volatile days later the talk is shifting back to the idea that there could indeed be a QE III. The last time stocks sagged for a week - the Fed came out with QE Lite and hinted at QE II. That supported the market for 6 months until the junkies... I mean market participants got nervous that their supply would be cut off in June.

As a reminder: QE3 is the rumored continuation of the Federal Reserves quantitative easing policies that have been in place since November's QE2 kicked off.

Through quantitative easing, the Federal Reserve creates money and buys government debt with the new money. This injects more money (in theory) into the system and boosts economic activity (in theory). However, oh I should just let the bears explain it.....

Warning: the cute bears drop a couple of s words in the video so be aware of that if you're at work.

This video is a little old and it's a little biased in its presentation, but the crux of the discussion is accurate. Lately, the Fed has been buying treasuries from Goldman (and the other primary dealers) just weeks after they've been issued. It's a stunning transfer of wealth from the taxpayer to the banks and it's happening in broad daylight.

Today, Mr. Dudley (the head of the NY Fed and former Goldman partner) was having a Q&A session with people in Queens. One of the members of the audience said "When was the last time you went grocery shopping?" Mr. Dudley replied that when looking at inflation they try to strip out things that are volatile (like food and energy, you know stuff we all need to live) and instead focus on the falling prices of iPads.

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful," he said."

Someone in the audience responded "I can't eat an iPad".

Starvation: Yep, there's an app for that.

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