Excellent stuff below from Euro Pacific Capital's Michael Pento:
QE2 is the worst thing I have seen yet from the Fed and Pento does a great job destroying it.
The best point he makes above is about the exit strategy. I have the same question: How do we ever stop buying treasuries without imploding the bond market?
So how did we get here?
The Fed's first answer to our debt problem was to increase our treasury issuance's in order to fund our bailout nation. This worked for a bit until the bailouts got out of hand as our spending addiction spiralled out of control.
When the treasury issuances exploded in terms of size we started running out of suckers to sell these bonds to.
Seeing that the game was about to end, the Fed implemented QE2 in a desperate attempt to keep the credit bubble game going.
The way I see it, this was a criminal act because the Fed basically made the US taxpayer the ultimate sucker/bagholder as they began using our money to buy bonds that no one in the world had any interest in purchasing.
So Pento asks a very logical question:
How does this process ever stop?
If the demand isn't there for treasuries and we pull out a few years from now what happens to the bond market and interest rates?
How is this process sustainable if the Fed backs out? The demand for this paper isn't there today, and it certainly won't be there tomorrow or 5 years from now because the world is broke up to their eyeballs in soveirgn debt. Their fiscal situations are as bad as ours if not worse(Japan, PIIGS anyone?).
We are going to be the largest holder of treasuries in the world by 2011. Can you imagine what the credit traders are going to do to the bond market if the Fed comes out and says QE is ending and then starts selling their holdings?
Interest rates will be in double digits almost instantly.
Because this is a PONZE SCHEME. The Ponzi only works as long as you can keep finding suckers to keep the game going.
We have now ran out of suckers so the Fed created QE, and in the process, made the US taxpayer the final sucker before this whole thing blows up.
This is one gigantic Madoff courtesy of the Fed.
The Bottom Line
The answer to Pento's question is an easy one. The Fed can never stop QE'ing because the Ponzi/bubble will pop. The only way this ends is by us stopping it via the bond market, dramatic budgetary reform, or a currency panic.
Greenspan was on "Meet the Press" this morning preaching the same thing:
"The United States must move to rein in its massive budget deficits or it faces the risk of a bond market crisis, former Federal Reserve Chairman Alan Greenspan said Sunday.
"We've got to resolve this issue," Greenspan said of the ballooning U.S. debt levels"
The idiocy of QE makes me speechless. This is "the last hurrah" folks before this whole thing comes crashing down.
I really hope the people that are responsible for this are held accountable in the end because this is going to be one of the worlds greatest tragedy's.
The Fed has backed themselves into a corner at this point and they have no way out.
I hope the bond market continues to sell off treasuries until the Fed is forced to take action and stop the QE insanity.