The big debate in the financial world right now is "how large will next week's second round of American Quantative Easing be?"
it's the wrong question for a variety of reasons and I hope to touch on them at some point during the week.
The mantra being repeated over and over is the looming threat of deflation. The supposed intent of QE 2 is to lower interest rates to promote job growth and avoid the apparently growing threat of deflation. But the very idea that the economy is weak because interest rates are too high is laughable.
One of the greatest elements that threatens deflation, as the US Federal Reserve is quick to point to, is falling real estate prices.
But here's a question for you.
Why, when real estate prices were rising, didn't the Federal Reserve (or our own Bank of Canada) raise interest rates to bring them down?
Now that they are falling, the US central bank (as well as the BOC) feels compelled to lower rates to prop them up.
If falling real estate prices threaten deflation, why was there not concern about an inflation threat when real estate prices were rising?
Under the new way CPI is calculated, housing is neither inflationary or deflationary.
In his weekly Op Ed column, Peter Schiff has a theory. He thinks the spectre of deflation is a red herring;
- "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. If the truth were known, a real panic would ensue. So, the Fed pretends buying treasuries is simply part of its master plan to boost the economy, even though, in reality, it is simply acting as the buyer of last resort."
Monetization of the debt under the guise of economic stimulus. More on this as the week goes on.
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