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Monday, September 21, 2009

Currency Games

I blogged before how the USD collapse since March to current levels. The Federal reserve bank, a QUASI private institution announced it will stop QE activities. What is quantitative easing? Its a fancy word for photo-copying money! OK, not quite that bad.....

US Treasury prints money by selling US Bonds at an interest rate. The bonds may be purchased by private investors, corporations, other governments. What cannot be purchased for example, is a different department in US Treasury, and start a cycle where infinite money can be printed.

The Federal Reserve Bank acting as a "private bank" has embarked on buying US Treasuries under Quantitative easing. But wait, is the FED truly private? Well the Fed has the backing of US taxpayer.....a debate of being private is thin at best.

So in my opinion QE is basically circumventing normal capitalism, and "cheating". The Fed announced they would allow this program die, announcing it was a success.

So what does this have to do with stock market?
AS previously mentioned, the US market entire bull run was at the expense of devaluing USD through QE. But wait... I just wrote that the FED is stopping QE...what effect will that have?

In all likelihood APPRECIATION of the USD, which means US stock market falling.
Also, as mentioned, US Treasury is selling bonds to others, so how much was the Fed buying of US treasuries in Q2? try almost 50% (click, source shaky)

So, if US government is selling tons of bonds to fund congress spending at breakneck speeds, with not enough buyers, what happens?

Lets just say, what could happen, we should all hope doesn't, market dislocation.
Likely case? Interest rates rise, which helps no one. And as earlier in this blog the best counter to rising rate? Falling equities "scaring" people into bonds.

But nothing is simple, the USG could get into arrangements where it buys country XYZ debt, they buy country ABC debt, and country ABC debt buys US debt. Nothing is ever what it seems.

Final spin: watch the USD, it is the whole story.

See below historical value of USD since 1971, from The Chart Store, below that, DJIA
From WebSurfinMurf's Financial Blog
From WebSurfinMurf's Financial Blog

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