20101116 PM

Dow 11,023.50 -178.47
Nasdaq 2,469.84 -43.98
SP500 1,178.34 -19.41
30-yrBond 4.2570% -0.1160

Yesterday, Monday November 15, the dollar closed above three recent peaks. Ireland, Portugal, and Greece continue to have immediate debt problems and Austria announced it may not fund Greece's debt.
With the dollar higher, the metals have correspondingly moved lower.

GLD 130.97 -1.45
SLV 24.93 +0.00
PTM 19.40 -0.61
XLE 61.45 -1.17
XLF 14.76 -0.25
VXX 49.34 +2.10 (4.45%)

REMX 19.43 -0.95 (4.67%). Market Vectors Rare Earth/Strategic Metals ETF.

A few days have passed since the Federal Reserve announced an additional $900 billion of quantitative easing. Let's review some well-placed propaganda.

In the October 18 issue of Barron's, Vincent Reinhart was interviewed by Jonathan R. Laing The Case for Quantitative Easing.

Some article highlights:

The interviewer asked "What about the Japanese attempt early in the decade?"
Reinhart answered "The problem with the Japanese is they went about easing in a half-hearted way."

The real problem was Japan had blown a massive credit bubble in the real estate market and was unwilling to allow bank failures to work out the bad debt. Therefore, the debt still exists and the Japanese economy continues to struggle under the debt burden. More easing would not have cleared the bad debt, just like more easing in the USA will not clear the bad debt.
The system of ever-increasing credit finally failed. Until the debts are discharged, no amount of fiddling will fix a fail system.

Reinhart said "When the Fed announces more quantitative easing, we might not see that much of a reaction in security prices."
It took a few days until debt blew out causing higher interest rates. Since November 8, the yield on the 30 year treasury has gone from 4.10 to 4.35. Interest rates are rising, the opposite of what Bernanke claimed would happen. Bond holders are going to continue to dump their holdings by selling into the Fed's bid.

Reinhart said "When the Fed purchases Treasuries, that also puts downward pressure on the exchange value of the dollar, and upward pressure on commodity prices."
The interviewer asked "Is that a good thing or bad thing?"
Reinhart said "It depends on your outlook."

For the average American, higher gasoline prices and higher food prices are not good.

Reinhart said "Hyperinflation occurs when central banks lose their discipline and monetary policy gets into the hands of the politicians."
The Fed didn't need any help from politicians to destroy the value of the dollar. Since it's creation in 1913, the Fed has devalued the dollar by 97%.

Reinhart said "Should one sit on one's hands instead, and not use all the tools at our disposal?"
The Fed is the number two holder of USA debt, behind the Chinese, and will soon be the number one holder of USA debt. The USA has a budget deficit problem with high unemployment and a collapsing real estate debt bubble. The Fed is trapped with no effective tools. Fed monetization of the debt is a tortured way of having the Treasury directly print money. At this point, the Fed is useless.

The simple market solution is to allow competing currencies. Other changes would be useful, such as reducing the insurance limits in bank accounts protected by the FDIC.