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Tuesday, May 17, 2011

Why An Unwind Of QE2, With Nothing To Replace It, Could Lead To The Biggest Depression Yet

It's too late now the game is up. If they stop easing or printing or whatever you wanna call it, the markets tank and all liquidity in the system freezes up. The only alternative now is to print and keep blowing the biggest bubble in history higher. At some point things will give.

Hint: The bubble is the supply of US currency, not gold, silver or other commodities. These will all have to rise. Hold physical silver and protect yourself from the death of the dollar.

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Why An Unwind Of QE2, With Nothing To Replace It, Could Lead To The Biggest Depression Yet

http://www.zerohedge.com/article/richard-koo-explains-why-unwind-qe2-nothing-replace-it-could-lead-greatest-depression

Over the past several days, quite a few readers have been asking us why we are so confident that QE3 (in some format: it does not and likely will not be in the form of the Large Scale Asset Purchases that defined QE1 and 2 - the Fed could easily disclose that it will henceforth sell Treasury puts, a topic discussed previously, or engage any of the other proposals from Vince Reinhart disclosed in June of 2003) will eventually be implemented by the Fed. Luckily, instead of engaging in a lengthy explanation of the logical, Nomura's Richard Koo comes to our rescue with his latest research piece. While we disagree with Koo on various interpretations of his about monetary theory (namely that the Fed is not in effect "printing" money and thus creating inflation - this is semantics and leads to a paradoxical binary outcome, whereby if there Fed was successful in boosting the economy, the economy would indeed be flooded with the nearly $2 trillion in excess reserves held with reserve banks. And good luck trying to contain this surge by changing the IOER - if the Fed indeed pushed the IOER to the required 5%+ level it would immediately destroy money markets, leading to the same liquidity freeze that marked the post-Lehman days, confirming the "Catch 22" nature of Quantitative Easing that we have observed since its beginning) we do agree with his analysis of what would happen to the economy if either stocks or commodities are in a bubble (and judging by the violent opinions out there, most investors believe that either one or the other has indeed reached bubble territory), should QE2 end cold turkey: "Viewed objectively, the central banks are trying to push up asset prices using quantitative easing and the portfolio rebalancing effect. The resultant rise in asset prices based on this effect represented a potential bubble—or at least a liquidity-driven event—from the start. The question is whether the real economy can keep pace with asset prices formed in those liquidity-driven markets. If it cannot, higher asset prices will be considered a bubble and will collapse at some point. The resulting situation could be much more severe than if quantitative easing had never been implemented to begin with." Bingo.

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z

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