In the last few weeks, I’ve become particularly “attentive” to the intentions of Fed policy makers following the scheduled June end date for QE2.
This is no small matter; an actual shift in Fed policy – as opposed to the smoke and mirrors sort – could temporarily play havoc on equities and commodities markets alike. How could it be otherwise, when under QE2 the Fed has been writing checks to the Treasury in amounts of upwards of $100 billion a month since last November?
As a point of reference, at the end of April 2007, the monetary base of the U.S. was $822 billion. At the end of April 2011, it will be $2.5 trillion, a three-fold increase. Call it what you want, “quantitative easing,” “stimulus,” “political payola,” “madness,” but monetary inflation is the correct term. And monetary inflation on this scale invariably leads to price inflation on a similar scale.
It is this “money,” steadily ginned out of thin air, that provides the fuel to keep the spendthrifts in Washington spending and props up the wounded economy.
It is also this “money” that sends equities and commodities soaring as investors look for higher returns and things more tangible to hold ahead of the rising inflation.
Removing the stimulus, therefore, will almost certainly have consequences.
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