Monday, April 18, 2011

Discussion of “Keynesian economics”-John Maynard Keynes not as stupid as politicians made him out to be.

This topic is off the topic of the banks- yet I’m still writing and posting it to address the fears on what would happen if we didn’t pass TARP. I’m a centrist republican because that’s my own chosen approach to the fiscal mess. To make this clear, I am NOT a libertarian. Ayn Rand thought that libertarians were wannabe liberals. I’m not writing this to shill for any politician; personally I believe that people, not the politicians will be the ones cleaning up this mess. People who identify with either side of the political fence (or none at all) both want the same thing. We want quality fiscal management, a stronger economy and we want our tax dollars to work for us. I’m not telling the democrats or republicans who to vote for. I’m simply going into a discussion about economics. You (the audience) will use the information as you see fit, and I hope that the democrats use their position effectively to combat the corruption within our government. GOP vs. Democrats- it’s just about checks and balances and we have to make sure it’s effective. Our country is not just in a deep recession, we have many, many opportunity costs to bat.

Ayn Rand is just a philosopher. Even she said that one must not learn economics from politics-and she’s totally right. When Keynesian Economics is mentioned in any political context, it automatically (and erroneously) is taken into context of the Laffer Curve. Which was cited as the printing of money as an economic stimulus. He wrote this in old English terms and politics has taken him out of context.

As a student in Intermediate Macroeconomics course (which I passed by the hair of my teeth); I can honestly vouch that the hardest part of learning Keynesian economics in the classroom was swallowing the subjective use of it. When we look at John Maynard Keynes in context, he’s brilliant. The material that’s taught in college level classrooms is just one of his strategies, not the entire scope of his work. They teach Keynesians as an absolute way of thinking, not as the strategy that it is. The University professors teach only small parts of Keynesian as a major topic without mentioning that Keynes is an entire complex set of strategies built generally around Adam Smith's Model of the Invisible Hand.

This is the way I was taught, and it's probably cause for the masses in the business world to not question the media and their politicians on why a strategy is being used to "stimulate the economy".

Libertarians triumph “Austrian Economics” as the key to economic fundamentals, but Austrian Economics is just that-the fundamentals of Economics. If anyone looks at Adam Smith’s and John Maynard Keynes work, they wrote complex and detailed volumes about economics and strategies. Obviously Public Relations firms and of course politicians have never explored this.

It’s quite verbose and hard to comprehend because it is written in Old English prose.

Those who oppose the Laffer Curve are correct. Even John Maynard Keynes would object to the politically subjective use of the Laffer Curve because we are in a “money shortage”-or what he calls a TRADE DEFICIT. And the Laffer Curve is incorrectly used in this scenario. The Laffer Curve may work well in China, Brazil, India, Australia and other developing countries since they are milking a trade surplus in the global economy. That same global economy that’s causing the money shortage (trade deficit) in the United States.

Laffer was Ronald Reagan’s second Treasury Secretary. Dr. Paul Craigs Roberts was his first.

This is Keynes’ General Theory of Employment, Inflation and Money.

http://www.scribd.com/doc/5858/Keynes-John-Maynard-General-Theory-of-Employment-1936

Let’s evaluate what Keynes wrote, see chapter 22 on the Trade Deficit. John Maynard Keynes called trade deficits a “money shortage”.

During a money shortage, Keynes recommended INVESTMENTS, not excessive stimuli or leveraging ourselves to a country that put us in the trade deficit to begin with.

Keynes said much about interest rates, but nothing on taxes during a time of deficits- or a "shortage of money"; which can't be adequately replaced by credit.

http://www.scribd.com/doc/5858/Keynes-John-Maynard-General-Theory-of-Employment-1936?autodown=pdf

See Pg. 196-217.

Underneath the Old School English lies Keynes' stratgies, one involving a combined currency to fix the problem-which didn't fly over well with today's economists.

I'm bringing this up because too many Keynesian hypsters (who never read his writings) parrot the phrase too conveniently erroneously as if the Laffer strategy was the entire scope of Keynesian economics.

Like mentioned before, Keynes himself gravely addressed the issue of trade deficit. Never did he say "tax the people" during this time of wealth depletion from the middle class as Bartlett may lead you to believe. CNN is not a trustworthy site for journalism unless you can calm your stomach during intense vertigo. The context contains way too much spin it's pointless for the articles to exist in the first place.

Keynes never said "create inflation and an unsecured credit market as the new currency- and ignore the trade deficit". The Obama Dream Team should take notes.

Many experts point to the trade deficit plus interest payables, or the current account deficit as the cause for the global recession.

Before we discuss the trade perils with China, we have to look at the oil situation as of now. Personally, I am suspicious that the BP oil spill was caused by eco-terrorism. That’s an entire can of worms, but I know that environmentalists are paid out by oil companies and PR firms to shill against their competition to secure profits for themselves. Some of these oil suppliers are overseas.

Goldman Sachs took the FREE loans from the Federal Reserve and speculated in oil and food in the same way they speculated in real estate (because “there is nothing else to make money off of”)- thus pushing the prices of oil (and food) way above the price equilibrium (where supply meets demand for price optimization for maximum profits). The loans for investing is called “margin” and much of the speculation is through use of margins.

Because the oil in the US is mostly imported from the Middle East, the speculators will make up any excuse to speculate in the commodity to push up prices. It’s bad enough that China (1.3 billion population) and India (1 billion population) will both drive up the prices when Obama’s dream team refuses to sign the permits to drill domestically. No I don’t believe in “Peak Oil”, that’s another excuse to push oil prices up.

The danger of oil speculation is the fact that it’s pushing prices up so more money can go offshore to the middle east. This is dangerous as we are already in a deep trade deficit and will make the deficit grow even further. The US is not creating enough wealth to compensate for the money leaving the country.


http://3.bp.blogspot.com/_Nq0iIm8IVr8/SbBpmyN9H9I/AAAAAAAAAAs/xZcN360ksvY/s400/usdandtd.gif

"The current account deficit is basically a giant loan made by investors in U.S. Treasury Notes to pay for overspending by consumers (trade deficit), as well as payments on assets overseas and some government spending."

The U.S. Current Account Deficit - - Threat or Way of Life?
By
Kimberly Amadeo, About.com
http://1.bp.blogspot.com/_Nq0iIm8IVr8/SbBpn9nfGLI/AAAAAAAAAA8/0gPNv2tx3mQ/s400/real_earnings.gif

The above chart shows the effects of outsourcing and offshoring production in the US. The dot com boom in the late 90's didn't help real wages on the grandscale if more money was being sent to China than the dot com made as a net profit (I believe the gross is $200 billion each year, I have to look at that again).

China bought US Treasuries to keep the value of the Yuan lower than the US Dollar. The U.S. spent way too much on the war in Iraq on top of the extra spending on the stimulus package and the useless bailout. Right now the Chinese hold $700 billion in U.S. Treasuries. The trade deficit hovers around $700 billion plus interest.
http://3.bp.blogspot.com/_Nq0iIm8IVr8/SbBpoGl08CI/AAAAAAAAABE/-jUVgZ4LSk8/s400/Slide1.GIF

See the above pie chart. The US just gave China an a large export market, at our expense. No other country sells it's market out like this. There is a reason why this happened, and that reason is not confirmed.


Now here's an interesting course of events. When Lehman Brother's collapsed, there was an electronic run on the banks worth at least $550 billion dollars. It's suspicious that this was a foreign investor but the identity has not been confirmed. Also, after teh G-10 and G-7 meetings, North Korea was somehow off the hook for having nukes. Not sure how China feels about North Korea but they were allies in the past.

Right after the subprime collapse, Henry Paulson rushed Congress to pass this bailout, at the taxpayer expense. After American bureaucracies were so kind to outsource jobs and factory production to India and China. After Bush borrowed tons of money from them to finance Halliburton, I mean the War in Iraq.

We still don't have transparancy on the bailout or the TARP. There were no auditors hired to investigate the situation with the toxic papers.

Again, I'll explain why the trade deficit is a financial massacre. If the floating net worth of the US is $60 trillion (appx-see World Factbook) and 95% of Americans own less than a liquid 1% of the total net worth (See wealth distribution or wealth inequality), then the majority of Americans are sharing less than $1 trillion between us.
http://3.bp.blogspot.com/_Nq0iIm8IVr8/SbBpnbTvFcI/AAAAAAAAAA0/mlo4Ups58B4/s400/wealth+inequality.bmp

The current account deficit hovered around $800 billion which leaves the 95% of Americans $200 billion (roughly-ball park figure) to split between them. Credit and derivatives was keeping the economy alive and the GDP at $13 trillion last year.


If for anything, not to treat us out here as if we were born yesterday. Americans are not "dumb". We're terribly misinformed.

Stick with fundamental education before you read the news. And never be intimidated or afraid to question your sources. FUD=fear uncertainty and doubt is a too common tactic to cause oppostion/competition to question the legitimacy of their statements.
It's only a tactic, the average person may prove to be smarter than they're made to feel about themselves.


Reagan’s tax cuts encouraged the rich to take their money out of the tax havens- and as a result that money ended up invested in businesses which spurred job growth, innovation and value creation. The Al Gore Act was similar in that it used pork to finance companies. The money ended up in a sector that was already set up to create value and wealth which is why the Al Gore Act was successful.

Like Bush, Obama’s money did not end up in the hands of businesses which is why his stimulus failed. Real estate and banks are a retail sector, their function is to store money and loan it. They are a service sector if you will. Real estate and banks cannot innovate, create, labor, produce or consume for the masses, banks and real estate are just a piece of the pie.

My own argument is that there is never a shortage of demand for money. As witnessed by the subprime scandal, excessive borrowing by individuals and even our governments’ waste of taxpayer money (leveraged by China); as long as people have access to money, they will spend it. The problem is a money shortage; caused by both the credit crunch and the trade deficit (reference
“General Theory of Employment, Interest and Money by John Maynard Keynes” Chapter 22).

So what is the answer?

Well, you have to market where the money is. And honestly this is where Wall Street is failing.

They lobby the US politicians for bailouts, not tax incentives for domestic and foreign investors to buy stock in US companies. Wall Street would rather take bread from the poor through public funds instead of getting commissions. And there are huge commissions to be made in the developing global economy.

As John Maynard Keynes mentioned, currency combinations and investments are the key to resolve the trade deficit. Asia and developing countries need not lose their savings in order to stimulate the economy.

The interest rate for the US dollar is really 0%. The banks love this, Bernanke works for the banks. The Federal Reserve is a privately owned institution. The banks are getting free loans on top of TARP and not lending.


The interest rate in China is currently 5.31%.http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=CNY.


And the IMF is pressuring China again to raise interest rates. Does China have a "bubble"? That's their business. They're leveraging our debt in order to keep their rates low.

"The IMF's call for central banks to permanently encourage a higher -- 4 per cent -- inflation rate is a recipe for higher interest rates, according to The Australian.

This would be costly for a capital-importing economy such as Australia's.

And it would risk providing the trigger for the US to engineer a return to 1970s-style stagflation by inflating its way out of its punishing public debt rather than accept the pain of fiscal belt-tightening."


http://www.news.com.au/business/imfs-inflation-call-recipe-for-an-interest-rate-hike/story-e6frfm1i-1225830325594

It seems like China wants to keep their rates low.

They're considering a wage hike to encourage their workers to buy more imports (vs. increasing the value of the Yuan).
http://www.bloomberg.com/apps/news?pid=20601068&sid=aUcY9RV8zvbw

Here's another problem with this Bubble theory- bubbles being a relative measure anyways...
China saved quite a bit when their interest rates were low. Low interest rates are supposed to stimulate borrowing and create bubbles, if that's the case why have the Chinese saved? I believe aforementioned blog written by Yves Smith was on the money.

"Economists estimated China's savings rates (the percentage of savings in a person's disposable income) remained between 30 percent and 40 percent over the years."
http://www.chinadaily.com.cn/bizchina/2009-01/07/content_7375620.htm

The truth of the matter is that interest rates can't determine market behavior, it's really just a marginal influence. During the dot com boom, Greenspan hiked our interest rates and we still had bubbles on tech stocks. The actual effects on spending and market behavior can't be changed through interest rates.


IMPORTANT POINTERS ABOUT INTEREST RATES, TRADE DEFICITS, INVESTMENTS AND INFLATION

So what does Carry Trade have to do with any of this?

First of all, what is a carry trade?

"A carry trade is when you borrow from a currency with a low interest rate, and then invest in a currency with a higher interest rate. Say the US interest rate is 3%, and the Chinese interest rate is 5%. Borrow at 3%, invest at 5%, make 2%, because the Chinese yuan is pegged to the dollar at a fixed rate.
Easy! Unfortunately, there's a Peso Problem in this trade, because at any time the Chinese currency could be devalued relative to the dollar, and you can lose years of money in one day."

http://www.businessinsider.com/why-china-hates-the-carry-trade-2009-11

NOW WAIT A SECOND!!! If people are borrowing money at 0% from the US and investing at 5% from China, why would they call this a bubble? If Soros is invested in a carry trade strategy that borrows from the US and invests in CHina, it looks like Soros is making a very healthy 5% off the deal.

China isn't too happy about this. They want to keep exporting.
In the following quotes, remember that George Soros is a currency speculator.
He remarks about China's bubble, yet he says nothing about Bernanke's interest rates. He does claim that gold is a bubble.

We don't necessarily need to listen to his advice, but watch what he does- or WHY he is saying this. He's an open book.

"China 'should let its currency rise' George Soros ...But there is one issue which still bothers many of China's critics - especially in the US - and that's its policy of keeping the Chinese currency artificially low in value. Which makes Chinese exports more competitive.
http://www.bbc.co.uk/worldservice/business/2010/01/100128_davos_soros_wbn.shtml

"Soros repeated that the Yuan is undervalued and allowing it to strengthen would be a “very appropriate thing” for the Chinese government to do. “If they don’t do it, there will be increasing pressure from the United States,” he said."
http://www.businessweek.com/news/2010-01-28/soros-says-chinese-stocks-are-overheating-should-be-slowed.html


Again, China buys debt from the US to purposely keep the Yuan artificially undervalued.

Now that we've discussed how our economic policies are set by currency traders; let's add oil to the equation. China's oil demand increases prices and our trade deficit has already increased thanks to a weak dollar and rising prices- just on oil alone.

A rise in oil prices plus a smaller valued Yuan could put China into a deficit? It would hinder their economic growth as it is.

Dr. Paul Craig Roberts was President Reagan’s first Treasury Secretary and he constantly defends the supply side stance applied to “Keynesian Economics”. They’ve been attacked since the wages didn’t keep up with inflation (yet Laffer was Treasury Secretary at the time, not Dr. Paul Craig Roberts) and they didn’t take into account the growing trade deficit. Dr. Paul Craig Roberts is very vocal in his critism of the offshoring, outsourcing and the trade imbalance.

http://www.vdare.com/roberts/101219_reaganomics.htm

This is where political bias makes for a huge headache. They’re too busy criticizing their political opposition which is messily laid thick in bias instead of looking at what worked and what will work to stimulate the economy.

The mistake that liberals and democrats make in public relations is that they’re using Saul Alinsky tactics in what is supposed to be a democracy. The goal of a debate is to win the audience (we like money, ask the diehard Clinton supporters in Silicon Valley)-not to beat the opposition. Saul Alinsky is way too concerned about not just beating the opposition, but beating the audience into submission as well: which works with a population that’s detached from their own esteem. (marketing and campaigning works with an element of psychology-ask Edward Bernays)

In reality, people are busy working, taking care of their families and trying to make ends meet. And in the recent economy, people have lost a lot of patience. We want to be won. I’ve supported Senior VPs who are republicans in the Bay Area, yes they do exist. And they want to be won. People want a candidate that they can fall in love with. Patience runs thin on the personal finance and business side, if the candidate trashes the audience- they lose the audience. It’s a huge waste of money pushed into campaign and marketing schemes. I don’t care that Soros paid for it, he never made a cent. He made his billions as a vulture, not a money/wealth creator. That should be a new venture for him, but he’s a little too screwed in the head to reason with.

Nobody mentions the trade deficit that grew exponentially when President Clinton signed a lopsided NAFTA with China. The Gore Act pushed public funds into the private sector (the dot com sector) that created wealth. In the same manner that pushing private investments into the private sector creates wealth. That’s how you stimulate the economy!

But this isn’t the bottom line with Reagan here. I’m trying to point out how Reagan applied his tax cuts so we know what worked.

“The best way to understand this is to compare what's being proposed now with what Ronald Reagan accomplished. In 1980, amid a seriously dysfunctional economy, Reagan campaigned for president on an economic recovery program with four specific components.

The first was across-the-board reductions in tax rates to provide incentives for saving, investment, entrepreneurship and work. The second component was deregulation to remove unnecessary costs on the economy.”

http://online.wsj.com/article/SB123431484726570949.html

The fallacy of the leftist attack on Reagan is that we are managing a domestic economy in a GLOBAL market. If the Cayman Islands holds a 0% capital gains tax, we have to do something in order to push offshore funds back into the U.S. so it can be used to create wealth. And it worked. When President Reagan cut taxes, the rich pulled their money from offshore accounts into the U.S. they had nothing better to do with their money so they put it in investments (back then-it was in companies so they can expand). THIS saved the economy. I personally attribute this tax cut to Reagan’s economic recovery more so than the Laffer curve because the investments enabled corporations to create wealth. The Laffer Curve was just inflationary. Now if we can get Bernanke to at least match interest rates with China; or increase them…carry trade investors will have incentive to put their money in US stocks. And hopefully it will be stocks, that create wealth. Subprime investments and speculation is just another case for inflation.

But still, I just pointed out evidence that you don’t need to push inflation to create wealth or to stimulate the economy.

And still, the Reagan Administration put much more genuine, detailed effort into economic recovery than the Obama Administration has (the Obama Administration-like Alinsky…just strives to beat the opposition which will lose the voting base).


Huffington again,

“Banks pay an average of about 7.11 percent for equity capital, according to Aswath Damodaran, a finance professor at New York University's Stern School of Business. That's the cost of financing a business in exchange for giving investors a share of ownership.”
http://www.huffingtonpost.com/2010/02/02/banks-could-get-money-fro_n_446803.html


What she fails to mention is that the primary dealers are getting free loans from the Federal Discount Window.

And this is of course going to be the Krugman bashing party. Its’ not that Krugman doesn’t know what he’s talking about. As a professor of Economics at Princeton, he is very fluent in the subject. As a matter of fact, the fundamentals that he teaches in the classroom is quite different than what he shills about in the New York Times.

“America Is Not Yet Lost – Paul Krugman
It should be a simple message (and it should have been the central message in Massachusetts): a vote for a Republican, no matter what you think of him as a person, is a vote for paralysis.”
http://www.nytimes.com/2010/02/08/opinion/08krugman.html?ref=opinion

“I do not know whether Paul Krugman has ever read Keynes’s General Theory; but if he has done so, he has mis-understood its message. For what Paul Krugman identifies as a liquidity trap is a supply side, not a demand side phenomenon. There is no evidence whatsoever that the demand for investment at current interest rates (incidentally Treasury notes with more than three years to maturity are nearer to 4 per cent than to zero in nominal terms, Mr. Krugman) is inadequate to move the economy to full employment equilibrium.
Evidence suggests that small firms are desperate for loans from the banks at current interest rates, but cannot obtain them because the big banks will not lend. “
http://charlesrowley.wordpress.com/2010/02/15/paul-krugman-on-the-liquidity-trap/


-How does Socialism work without a democracy? Does the 1st Amendment not constitute our democratic rights? What about the right to vote? If we are not a democracy, can we not vote in a manner to fix the Republican Party? Political parties and the separation of powers acts as a form of Checks and balances. Democracy is power to the people. If the Republican Party is “inheritly evil”, then where is the democracy, or the people’s power to uphold the government in a more socialist system that Krugman advocates? And what good is democracy with a misinformed public? What good is democracy if the people choose not to exercise it?

Remember, Krugman taunts the tea party protesters, and in doing so he discourages the use of democracy.

On Bernanke, Federal Reserve policies, Quantitative Easing and the hidden taxes hike.

End the Fed movement was started because it's illegal to encourage a revolution against the US Government. Since the Federal Reserve is supposed to be an independant institution, calling a revolution against the bank isn't illegal.

http://www.law.cornell.edu/uscode/18/usc_sec_18_00002385----000-.html

My main disagreement with Bernanke is that I KNOW we've seen inflation, not deflation. The CPI doesnt' include the cost of gas/food in their calculations, but the talking heads use real estate correction to argue deflation (when real estate was never considered in the CPI index before the subprime collapse to calculate for inflation). Bernanke is going to keep rates at 0% and I think he should raise them. QE1&2 will inflate the economy but our tax brackets will not go up enough to match... the inflation. Which means we pay higher income/corporate/sales taxes.

:-)

I do agree with Bernanke, that he can't fix this because of financial regulations/fiscal policy. He's just in charge of the monetary policy. He can't reinstate the Glass Stegall Act, he can't impose a Usury Law, that's Congress's job. Except that Frank and Dodd are letting the banks write their own rules.

http://www.creditwritedowns.com/2010/11/does-ben-bernanke-believe-the-stuff-he-writes.html

Quantitative Easing is supposed to reenact the Bank of England policy in 1825 to save the banks. In short, their central bank borrowed gold from France to liquidate their banks. Their interest rate was high, bank deposits still low... and they lent to their consumers aggressively for any kind of collateral. It didn't say whether or not they used tax dollars to liquidate the banks with.http://research.stlouisfed.org/publications/es/09/ES0907.pdf

The reason why it isn't going to work is because the rates are too low and the banks are not lending(which can't be solved by the Federal Reserve). And the collateral issue is another hairy issue, that has to be addressed by fiscal policy.

$1.7 trillion QE can't mask a fruadulent $300 trillion subprime scandal.

per the article: "A 10 percent decline in the dollar in the first six months of next year would push the economy above estimates of trend growth, moving indicators on inflation and employment more rapidly toward the Fed’s policy goals, acco...rding to a simulation run by Macroeconomic Advisers LLC on their model of the U.S. economy. Effect on GDP Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent."

-a 10% decline in the dollar with 0% interest rates (while China's is 5.29%) retains the same effect unless an actual trade policy is changed, ie. change in barriers to US exports to China, etc. The only thing China is going to buy is companies. It doesn't guarentee exports of raw materials.

"In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points." Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast."

-Will the 10% reduction in the dollars' value equate to a 10% rise in the tax brackets for sales, corporate, income and capital gains taxes? Let's say this year somebody made $34,000 (single filer) and is taxed at 15% in 2010. In 201!, they should be making a MINIMUM of $37,401 to be taxed in the higher bracket.

Let's say a company makes $10,000,000 this year and is taxed at 34%. Next year, they need to make a minimum of $11,000,000 (10 million * 1+10%) to stay at the same rate if the dollar devalues 10%. Approximately. If not, that tax hike (inflation) goes to the consumer or leaves the company with less working capital to hire employees (or provide benefits) with.

Because there's no guarentee in exports because of the rates, there's no guarentee in increased employment (vs. decreased unemployment). The employment might go to our Univerisities. But not to the ports. An unknown variable. Btw, it's not a good idea to justify risky plans with the use of unknown variables, that's just common sense.

"The consumer price index, minus food and energy, would rise 0.4 percent and 0.7 percent more each year."

-the CPI should include food and gas, especially gas since that will probably increase more than 10% if the dollar is devalued. Esp. since we import it and global demand is increasing.

"A continuing rally in stocks could also provide an added lift to growth, the firm’s simulation showed."

-fake subsidized rally. Costs much more than America's social services combined.

QE leaves us at a strong risk for stagflation and it weighs on too many unknown variables for a better outcome. Carry traders (those who buy at 0% and invest in China at 5.29% are the ones who lobbied our lawmakers to cling onto currency valuations as "the answer" for our trade issues).

But of course, QE has nothing to do with the Economy... bond buying just keeps the yields low til the end of 2010.

"Overall, though, while more quantitative easing will help to keep interest rates low, primary dealer banks aren't fully convinced that the move will prove to be the U.S. economy's knight in shining armor.

http://online.wsj.com/article/SB10001424052748704049904575554530630999098.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

The Federal Reserve just buys bonds from Treasury Secretary Geithner to collect interest/yields from those US Treasuries to make FREE loans to the "bank holding companies". Yield/interest on US Treasuries come from the American Taxpayers.

-Do we get that money back? NO.

-Do we get to charge the Federal Reserve for using our money? NO.

So basically the Federal Reserve uses that money to make free loans to "bank holding companies" many who are TARP recipients (like Goldman Sachs). Who use that money to...

1. buy US Treasuries to get the yield/interest.

So instead of investing in loans, the banks are turning back around and buying high-quality securities like long-term Treasury bonds. Today, a 10-year Treasury is paying a yield of around 2.5%. With a cost of funds of 0.25%, this gives the bank an interest rate spread of 2.25% -- a very nice profit with almost no risk.

http://www.investinganswers.com/education/primer-quantitative-easing-what-it-and-will-it-save-economy-1941

2. use with their high frequency trading platform to manipulate a thinly traded market.

http://www.wired.com/threatlevel/2010/03/manipulated-stock-prices/

3. borrow at 0% then buy in a foriegn countrie (ie. China @ 5.29%)-also known as acarry trade.

"It may help to lower rates temporarily," said Ward McCarthy, chief financial economist and managing director of the fixed-income division at Jefferies & Co. in New York, "but is unlikely to have a significant beneficial effect on the economy."

That is because such a program won't ease credit conditions for small businesses that are dependent on banks for lending, he said, nor will it lower borrowing costs for homeowners who are unable to refinance their mortgages because home prices have f.

Priya Misra, head of rates strategy at Bank of America Merrill Lynch in New York, said, while asset buying will be effective in keeping interest rates down and will prevent inflation expectations from falling much further, the effect of the program on employment "is much slower.""

http://online.wsj.com/article/SB10001424052748704049904575554530630999098.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

So how much money is used for a QE?

QE2= $30 trillion

http://www.marketoracle.co.uk/Article22933.html

Another source has different quotes:

QE1=$1.7 trillion

QE2=$2 trllion

yet the $30 trillion came up again...

"I am pretty sure he said it would take $30 trillion to do the job – given the scale of wealth destruction from the US property crash and ferocity of debt deleveraging still to come."

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007647/qe2-in-round-trillions/

“January, 2010 real M3 fell an estimated 5.2% versus January, 2009, following an annual contraction of 3.3% in December, 2009 and 0.3% in November…

Commentary No. 268 of December 30, 2009 discussed the leading relationship between real (inflation-adjusted) year-to-year contractions in the broad money supply (M3 and the SGS-Ongoing M3) and the economy, and a signal for a double-dip downturn. In modern economic history, every time there has been such a year-to-year liquidity contraction, the economy subsequently has turned down, or if already in recession, the economic downturn has intensified. A signal for such an intensification of economic contraction was generated in November and December, and the signal got significantly stronger in January.”

Plunging Inflation-Adjusted Annual M3 Change Generates Intensified Signal of Renewed Economic Downturn. John Williams, Shadowstats.com

The foregoing indication of a dramatic contraction in the money supply is but one more indicator of looming Armageddon in the Economy and markets.

Consider also the following Real Numbers from Shadowstats.com which calculates the Real Numbers for the U.S.A. the way they were calculated in the 1980’s and 1990’s before Official Data Manipulation began in earnest.

Official Numbers vs. Real Numbers

Annual Consumer Price Inflationreported January 15, 2010

2.72% 9.68% (annualized January Rate)

U.S. Unemployment reported February 5, 2010

9.7% 21.2%

U.S. GDP Annual Growth/Decline reported January 29, 2010

0.10% -4.62%

http://www.financialsensearchive.com/fsu/editorials/deepcaster/2010/0212.html

In short, the job data published in the news cited an "increase" in 150,000 some jobs. If you look at the actual data,

http://bls.gov/news.release/empsit.a.htm the number of Americans employed in the civilian work force DROPPED 254,000. (that's jobs lost) The "net gain" are from people who are "Not in Labor Force". So much for Quantitative Easing (for the aforementioned reasons, it obviously didn't work), we're looking at a possible stagflation situation here.

Stagflation = unemployment + inflation

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