Saturday, October 9, 2010

QE2 Ready to Sail

People ask me why the US stock market has been so strong lately. The answer is simple - QE2.

No, not the ship. QE2 stands for the second round of Quantitative Easing (money printing) from the US central bank - the Federal Reserve.

Much like QE1, it is expected to be in the one trillion dollar range. And like the first round, Wall Street is expecting that money will flow directly into its coffers, with very little trickling out to Main Street.

That gives Wall Street a lot of money to "play" with and speculate. Plenty of money to push bubble stocks like Apple even higher.

And importantly to Uncle Sam, it allows Wall Street to buy more of its debt and keep the Treasuries bubble going too.

Bottom line - with a trillion dollars, you can throw a heck of a party (for a while).

And as mentioned in prior articles, Wall Street could care less that this money printing is slowly destroying the US dollar.

They are not concerned about 'real' returns, but only nominal returns which allows them to pay themselves large bonuses every quarter.

But the value of the US dollar is important to the average American. Look at what has happened since all ties were removed to the gold standard by President Nixon in 1971.

With nothing to hold the Federal Reserve back, the US money supply increased 1,314% between 1970 and 2008...and the stock market rose 15 times - right in line with the money printed. That is why Wall Street celebrates every time more money is printed.

But for the average Joe, it's a different story. Consumer prices rose fivefold during the same time frame. So any nominal gains in salary were eaten up by a three-quarter decline in the value of the dollar and inflation.

This led to an ever increasing income gap between the classes.....

During the 1960s, the bottom 90% of the population got 60% of the income gains of the period. But by the end of 2007, that segment of the population got only 11% of the income gains.

Half the nation's income today goes to the 20% of the population,nearly twice as much, compared to the bottom 20%, as in 1967. This is the largest gap ever recorded.

Nothing is being done to stop this insanity. Congress is doing its usual smoke and mirrors act and blaming those 'manipulating' Chinese for all of America's economic woes.

Their 'solution' will only result in higher prices for American consumers and a movement of jobs from China to lower-income countries around the globe.

Meanwhile the real problem is reckless fiscal and monetary policy the United States has followed over the past 40 years. Unfortunately, these policies show no signs of ending any time soon.

Here is something I read this week at the Daily Reckoning website which puts things into perspective:

"What's the difference between a thief and a counterfeiter? A thief takes what is not his without another's consent. A counterfeiter passes off as genuine that which he knows to be a fraud. Or, in simpler terms, one is a politician and the other is a central banker."

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