The Fed's Quantative 'Easing', Madoff, and Foreign Buyers Balk

The past weeks have witnessed more elements of the tectonic shifts I have been commenting on over these 18 months: the Fed's hand has been forced, Bernie Madoff made Ponzi proud, and our debt has begun to spoil on the shelves of the global financial supermarket.

The Fed has retrenched interest rates to near zero in an effort to stimulate lending and now has resorted to what is called in sugar-coated terms 'Quantitative Easing'. Don't be fooled by this innocuous facade: this is the denouement in our own government's climatic war to destroy the US dollar, which has lost 95% of it's value over long term charts. Quantitative Easing is a veiled way of saying 'turn on the printing press' in order to get more dollars flowing through the economy. I will remind you that the Fed intentionally chose to cease publicly releasing the M3 number in 2006, which is the best gauge of the total dollars in circulation. Now with quantitative easing officially in place, that move prevents us from knowing how much monopoly money is now floating around, but sadly that currency is not a board game, but the game of our lives with our dollars. This affects all of us who earn dollars, who might be in the minority of Americans who actually save dollars, as each one of those dollars will doubtlessly lose value as the Fed puts more and more of them into the fiscal engine. The best part is the veil of secrecy is equally wrapped around the $2 Trillion in lending the Fed and Treasury have imparted as they refuse Bloomberg's Freedom of Information Act inquiry to name the recipients! Mind you, the American people had no vote on that spending of their tax dollars even though we were so up in arms over the measly $700 Billion bailout!

We are facing short-term deflation because huge financial institutions and businesses are having to sell everything to raise cash to pay off loans they can't afford. This massive sell-off leads to a drop in prices for everything, especially as noted in the recent price of $1.65/gal for regular unleaded I saw yesterday. This global deleveraging will abate however in the coming six months yet has lead to a temporary rally in the value of the US dollar. As the dollar gets stronger, the price of dollar-denominated items drops, hence the retrenchment in oil, gold, corn (down 55%), steel, copper and the rest of the commodity complex. But 2009 and 2010 will most likely see hard assets shoot up again in dollar-terms precisely because of the quantitative easing that the Fed has embarked upon. The Central Banks of the World are doing their best to 're-inflate' the prices of hard assets' values, yet the effect will be the decimation of the value of the US dollar, and with it the purchasing power of all of our retirement accounts. Gold should hit $1500 by the the middle of 2010 from its current $820. Oil will breach $100/barrel by then again, if not higher. The longterm fundamentals of an infrastructure boom will rekindle global demand for steel and other metals such as copper, even if China and India have a bumpy ride over the next two years. $1.65/gal will seem godsend in a few years.

This week also saw the revelation of the scheme by Wall Street Broker Bernie Madoff who made Ponzi proud: by his own estimates, investor losses hover around $50 billion! "All Praise Deregulation" since Reagan has been the Mantra! Clinton didn't do much to abate the slide and Bush certainly put pushovers in charge of oversight and now foundations like the Lappin Foundation have instantly shuttered their doors and fired their employees while cancelling all programs because of 100% losses while in Bernie's care. I note this because our government has consistently failed to protect us and continues to do so: how can a scheme get that big and not come onto any watchdog's radar? How many scandals of excess and greed can occur, how many retirements must be decimated, before the people demand real accountability? I won't recount all of the scams and abuses of the past decade but suffice it to say, the average investor has been brutalized when we look at the returns of the Dow over a ten year span, yet economists and traders have acted like omniscient sages who should now admit one thing which is that they don't actually know anything and if they did, they should be hat in hand admitting either their wrong-doings or their blindspots. This system is broken and Bernie Madoff knew it.

Finally, Bloomberg reported yesterday that Foreign Buyers greatly reduced acquisition of our corporate debt, agency debt, and stocks! This may not seem like such a big deal but it is like calling a bluff in poker: the US NEEDS foreign investors to buy our IOU's! Without that, the system is exposed for the proverbial House of Cards it is. Agency debt is government debt issued via Fannie Mae and Freddie Mac. To explain further, Fannie and Freddie buy mortgages from US lenders and then packages them into bonds and sells them to Foreign Investors, which in turn allows the US lenders to write more mortgages. If the investor community stops buying our debt, or worse starts selling our debt, the value of our IOU's diminishes greatly which in turn puts significant pressure on the value of the dollars those debts are denominated in.

In short: quantitative easing, deregulation, and decreased demand for US debt is a disastrous concoction for the value of the US dollar. Don't be fooled by the recent strength of the dollar. Obama has a tantamount proposition in front of him, and I wish he would truly herald change with faces other than those littered in the Clinton era, especially Rubin and Summers who championed deregulation. Secretary of State Clinton could lead us into war with Iran to protect Israel, which, when combined with the aforementioned pressure points on the US dollar, could see $200+/barrel of oil in the not so distant future.

It is time for accountability. It is time for the republican free-marketers to relinquish control and stop shouting that regulation is bad. Deregulation as it is manifested now is much worse and has destroyed many lives. We must stand up for the purchasing power of our saved dollars or shift those assets into gold and foreign dividend paying companies. Either way, complacency can not be an option.