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The Fed No Longer Cares About Hiding The Fact It Is
Killing The Dollar
Analysts, Economists, Even Fed Employees Warn
Against Disastrous QE2
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 A
number of prominent figures within the financial world are warning
that a second round of quantitative easing, expected to be announced
today by the Federal Reserve, will have disastrous consequences
for the US dollar and the global economy.
The Fed will release a statement this afternoon,
most likely confirming that it is to buy at least $500 billion
of long-term securities, in the form of printing money out of
thin air.
The justification is to offset deflationary fears
and stimulate spending, however, critics have refuted this outlook.
Peter Schiff, CEO of Euro Pacific Capital notes:
"At the end of the day, all this deflation
talk is a red herring. The true purpose of QE 2 is to disguise
the decreasing ability of the Treasury to finance its debts.
As global demand for dollar-denominated debt falls, the Fed
is looking for an excuse to pick up the slack. By announcing
QE 2, it can monetize government debt without the markets
perceiving a funding problem."
"I think that this will quite possibly be
the worst mistake by the Fed in a generation," adds Stephen
Stanley of Pierpont Securities.
Bill Gross, the manager of the world's largest
mutual fund, told
Reuters on Monday that he fears that the measures
will result in a catastrophic decline in the value of the dollar:
"I think a 20 percent decline in the dollar
is possible," Gross said.
"When a central bank prints trillions of
dollars of checks, which is not necessarily what (a second round
of quantitative easing) will do in terms of the amount, but
if it gets into that territory—that is a debasement of
the dollar in terms of the supply of dollars on a global basis,"
Gross told Reuters in an interview at his PIMCO headquarters.
"QEII not only produces more dollars but
it also lowers the yield that investors earn on them and makes
foreigners, which is the key link to the currencies, it makes
foreigners less willing to hold dollars in current form or at
current prices," Gross added.
The Fed seems unconcerned that the public impression
it is creating is that it is clearly acting to debase the US
dollar.
"It's a desperate act," says Jeremy
Grantham, co-founder of the investment firm GMO.
Grantham says it's a clear message from the Fed to the rest
of the world: "The U.S. doesn't care if the dollar weakens."
James D. Hamilton, a University of California,
San Diego economist notes that Bernanke may risk increasing
expectations for higher inflation by too much,
causing a shake- up in currency and bond markets.
"That perception alone would bring about a series of immediate
challenges, such as a rapid flight from the dollar, commodity
speculation and possible under-subscription to Treasury auctions,”
said Hamilton, a former visiting scholar at the Fed board and
the New York and Atlanta district banks.
"The real ugly question is, will this ultimately end up
being inflationary?" said Scott Minerd, the Santa Monica,
California-based chief investment officer at Guggenheim Partners
LLC, who helps oversee $76 billion. "In the long run, five
to 10 years from now or in the next decade, this is going to
be a massive problem."
The London Telegraph's International Business Editor, Ambrose
Evans-Pritchard, agrees with this outlook, noting that QE2 risks
currency wars and the end of dollar hegemony:
"The Fed's "QE2" risks accelerating the demise
of the dollar-based currency system, perhaps leading to an unstable
tripod with the euro and yuan, or a hybrid gold standard, or
a multi-metal "bancor" along lines proposed by John
Maynard Keynes in the 1940s." Evans-Pritchard writes, referring
to the stated
intention to institute a new global currency out
of the ashes of the crippled world economy.
The most noted critics of the plan, however, have
been Fed members themselves who fear the plan is dangerous,
unnecessary "bargain with the devil" that will fuel
long-term inflation.
As reported by Bloomberg:
Kansas City’s Thomas Hoenig, who has already
dissented six straight times, said Oct. 25 that he opposes
more easing and because it’s “a very dangerous
gamble” that may accelerate inflation and create asset
price bubbles. Dallas Fed President Richard Fisher and the
Philadelphia Fed’s Charles Plosser have also spoken
out since the FOMC’s last meeting against more action
by the central bank.
In addition, Minneapolis Fed President Narayana
Kocherlakota has questioned whether QE2 will work. Richmond
Fed President Jeffrey Lacker has also seemed to doubt whether
it is necessary.
Instead they say that the markets should be allowed
to correct themselves.
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Steve Watson is the London based writer
and editor at Alex Jones' Infowars.net,
and regular contributor to Prisonplanet.com. He has a Masters
Degree in International Relations from the School of Politics
at The University of Nottingham in England.
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