What is Really Going on with The Fed and the Unprecedented 'Supply' of Money

[konkon]

What happens in the US tends to directly effect markets here in Australia. So what the Federal Reserve does in the US will have a trickle-down effect in Australia.

The Federal Reserve in the US has become a champion to big corporations in the US by guaranteeing the availability of liquidity and capital at record volumes and low yields and it will continue to do so, as it will always be there for big corporations. The excuse given is that if this was done in the 1930s then the US (and the rest of the world) would not have gone through a depression, and by doing this this time round the Fed has prevented a similar depression-like scenario. But this action has reinforced the 'bad' behavior of large institutions and banks, and it will filter its way to the consumer in the US eventually, once the consumer begins to borrow etc.

It is business as usual for most US institutions (that are still around) and this euphoria was and is reinforced by the US Federal Reserve as it stated that it would not allow these (irresponsibly) large institutions to 'fail' (again). But they did and they will again. The difference between now and lets say the late 40s is that they would have the scars to remind them that there is a discipline involved in lending, trading and speculating.

What surprises me is that a lot of the blame was directed at the previous US Fed Reserve and their ease of liquidity policy in around 2002 (and possibly before) that allegedly 'caused' markets (including housing) to inflate. Even if this is true, then what is being done today by the Fed Reserve is potentially worse as the liquidity that's been provided is around 7 fold to the 2002 example.

But is there another reason why the US Federal Reserve is pumping so much liquidity into the system? Could it be that by doing so, you are ensuring that the US has a weaker currency, thus helping your very large export corporations (some of which are at record highs on the stock market)? There will always be a winner in a game. The Fed also knows that by oversupplying the USD (making it cheaper) it has inevitably and inversely strengthened other currencies and conversely strengthened all commodities (most of which are at record highs). So what's the problem? The problem is that this inevitably creates inflation and true growth in your real economy has been stifled because of high inflation and high energy etc prices. So rallies like we have seen recently might have very little fundamentals attached.

From the US's perspective, you can make your competitors (includes other countries) peddle backwards by deliberately 'creating' and reinforcing this low US dollar, high inflation, high commodity/energy prices. A lot of unrest has resulted from these inflationary scenarios. This inflationary scenario doesn't benefit China either as it battles serious inflation and needs a healthy world economy. So how much is the rest of the emerging-market world being priced-out of this game? How much real inflation and potential danger is there in China, which still pegs its currency to a falling USD, but should appreciate when they've got around +10% growth?

 

[konkon]

The China factor is an interesting one. There is a general consensus that the US will basically step aside in the future and allow China to gain control of all aspects related to the world's economy. But this won't happen. What is going on with a low USD, a Chinese yuan 'pegged' to falling USD, and growth of around +10% in China, will cause problems for China down the track. The seeds of future instability, out of control inflation etc in China have already been planted. There is no way the US will ever give up its control of the world markets, like Britain did in the early 20th century (or before).

 

[konkon]

Well, we've had some time to see that the (privately owned and run) Federal Reserve System has helped price-out the masses around the world, and burden them with more debt/credit to balance paying for various bills, with existing revenue (wherever it can be found). It did so with the two QEs; notice how the USD has rallied since it ceased the second QE and didn't announce another QE? Basic really. Also notice how commodities have fallen in price, which should over time help people pay for bills without the need for more credit; it will make commodities cheaper and help remove, middle-man, speculators out of the equation for now.

If you think that the Fed's practices haven't really made a difference, think of it in this way; the basic elements and the compounds made from them (that are all round us) won't be as expensive as before (with some exceptions like gold in a non US, foreign currency), at this rate. We need some more time to assess the outcomes. There are of course other factors that still make things expensive to some degree; too much debt to pay-down still, for example, which affects cash-flow and purchasing power. This is still a bi-product of flawed Federal Reserve practices and those very powerful institutions that sponsor and benefit form such practices.

Unfortunately for the masses around the world, and in the US, the Federal Reserve System (which is privately run and owned and not part of the Federal Government in the US!) is an incredibly powerful, influential system and it can still do as it pleases, without congressional oversight (even though the meeting between the two offer a good show!). I'd be watching the Fed Reserve's every move and question it in the future. At least, our western systems still allow us to do this. Thank God!

P.S. the Fed Res really has very little opposition and this is the scariest thing going forward. There is very little anyone can do about their actions. Not just talking about citizens here! US courts and all government officials cannot oppose the Federal Reserve's actions. There may come a point where we are totally at the mercy of the privately owned and run Fed Res System. And this could cost us dearly!!