QEII – No Luxury Liner for the Average Citizen

As the country was watching the election results of November 2, 2010, the Federal Reserve was quietly implementing the second monetization of debt, called QEII.  This Keynsian-style move of issuing debt and buying it back has some unintended consequences:

First, the dollar is devalued.  It is estimated that the dollar will be worth 20% less over the next few years.  This, in effect, is a massive tax hike on every American and, especially, hurts the working class.

Second, commodities prices go up, and, as commodities prices go, food prices rise.  Already a number of food producers have announced significant price hikes.  Dr. Lacy Hunt of Hoisington Investment Management Co., wrote, “Quantitative Easing has unintended negative consequences for real household income. Due to higher prices of energy and food commodities, QE may result in less funds for discretionary spending for consumers whose incomes are stagnant.  Also, with five-year yields falling below 1%, rates on CDs and other types of short-term bank deposits will decline, also cutting into household income. At the end of the day these effects will be more powerful than any stock-price boost in consumer spending, which, as always, will be very small and slow to materialize.”  This type of situation has potential to spur hoarding, making diminishing food supplies on the shelves.

Third, the monetary system falls into a “liquidity trap.”  John P. Hussman said, “The hallmark of a liquidity trap is that holdings of money become “infinitely elastic.” As the monetary base is increased, banks, corporations, and individuals simply choose to hold onto those additional money balances, with no effect on the real economy… As interest rates decline toward zero (and especially if the Fed chooses to pay banks interest on cash reserves, which is presently the case), there is no effective difference between holding riskless debt securities (say, Treasury bills) and riskless cash balances, so additional cash balances are simply kept idle. (John P. Hussman, Ph.D. www.hussmanfunds.com). 

Fourth, we are setting up for a significant global backlash.  China, Germany, Brazil, among others have strongly condemned the Fed’s action.  China, who holds a lot of U.S. debt, is to the point of refusing to buy more U.S. debt.  This could trigger a series of events that could collapse economies.

In the day, the QEII was known for luxury (as an ocean-going cruise ship).  Today, QEII stands for anything but luxury.