Monday, November 2, 2009

Dangerous Side Effects of Ultra-Easy Money

October 29, 2009

Dangerous Side Effects of Ultra-Easy Money
by Gary Dorsch

Operating under the elixir of ultra-low interest rates, and flush with trillions of fiat currency at their disposal, courtesy of the world's top-20 central banks, hedge funds and banking Oligarchs are once again making risky and daring bets in commodities, emerging markets, junk bonds, and blue-chip stocks, defying gravity with trades that would have been un-thinkable just six-months ago.

In order to engineer a 180-degree turnaround in trader psychology, from the chronic fear of meltdowns last year, to the opposite side of the spectrum - the euphoric illusions of V-shaped recoveries, the "Group-of-20" have committed $12-trillion of taxpayer money, equivalent to a fifth of the entire globe's annual economic output. The G-20's largesse has been used to fund capital injections into banks, soaking-up toxic assets, guaranteeing financial company debt, and flooding the world credit and stock markets with ultra-cheap liquidity.

On Sept 20th, the G-20 nations, which account for 90% of the world's output, agreed it was too soon to begin withdrawing the $5-trillion of surplus cash that's been injected into world money markets. The IMF estimates that banks in Britain, the Euro-zone, and the United States have recognized slightly less than half of the $3.4-trillion of bad loans sitting on their books, and are still struggling to absorb heavy losses primarily from failing US mortgage loans.

The G-20 says its drawn-up plans for coordinated exit strategies that would drain trillions of dollars of liquidity, such measures are still seen unlikely until sometime next year. On Sept 25th, US Treasury chief Timothy Geithner noted that although the global economy has pulled back "from the edge of abyss" and was showing early signs of resuming growth, it's too early to let-up on the monetary accelerator. "We still have a very long way to go," he said.

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4 comments:

  1. the race to the bottom has begun...with the world awash in recently minted money and the dollar falling, other central banks are responding either by buying dollars to keep their currencies from appreciating, or, as in the case of mexico & brazil, levying a 2% tax on incoming funds...

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  2. this chart tells you all you need to know about QE: 50 year Chart: M2 vs Monetary Base(source: Fed)

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  3. Money is being created so fast it just seems impossible that any kind of "easing" is possible at this point. Or if it is, would it take decades to "ease" it out of the system? Is this possibly what's happened with Japan?

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  4. japan has just refused to bite the bullet, and continues to subsist on a debt to gdp ratio much higher than ours; and the markets indicate that lack of faith as CDSs on their notes have risen to 63 basis points (vs 24 for ours); the Feds problem will be how to slowly drain the punchbowl without quickly ending the party...and as roubini and the economist have pointed out, that will be complicated by the dollar carry trade, which might completely reverse at the first sign of an end to QE...

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