Detroit — Alice laughed. “There’s no use trying,” she said. ”One can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.” — From “Through the Looking Glass” by Lewis Carroll.



I suppose by now you have heard the great news? The government tells us that the recession is over and it’s been over since a year ago! Who knew? Of course, there’s that pesky little problem with unemployment still close to 10 percent and U-6 unemployment over 16 percent. I wonder if those people think the recession is over.

And then there’s the housing market that continues to languish and another round of foreclosures and mortgage defaults on the horizon. Deflationary forces continue as consumers and businesses continue to deleverage, i.e. reduce debt either by paying it off or defaulting. Yes, everyone is entitled to their own opinions. They’re not entitled to their own set of facts.

And now the Federal Reserve has basically said they’re willing to spend even more in the bond market if the economy slows. This is a fancy term called Quantitative Easing (QE), which simply means they print money they don’t have to buy the bonds, thereby increasing the debt on the Fed balance sheet. Of course, you are on the hook for it. There is now talk of possibly another round of QE, not so affectionately called QE2.

It looks like Japan is willing to do the same thing, as they dropped their interest rates back to zero and said they would start buying up all kinds of assets to keep prices from falling. This also has the effect of causing their currency to drop, thereby helping their export economy by making prices cheaper on the world market.

Of course, that is what they have been doing for the last 20 years in a desperate attempt to shake their economy out of long term-deflation. It hasn’t worked and their national debt is now over 250 percent of GDP. (Ours is currently about 90 percent and climbing.)  From an economic standpoint, the Japanese economy is a bug looking for a windshield.

The Fed’s recent move sets up another round of the bizarre scenario where all news drives the equity markets, commodities and precious metals higher. Good news is seen as good and bad news is seen as further reason for the Fed to do more. The markets are in total denial, but sooner or later reality will hit.

So far, the Fed has used the funds rolling in off of its maturing mortgage portfolio to buy treasury bonds. This keeps treasury prices high and yields low, thereby affecting all assets (like mortgages) priced off of treasury yields, and also keeps liquidity flowing.

As long as new liquidity flows into the market, we will see a continued devaluation of all dollars already in the system. In my opinion, this is largely what is causing the increased prices for precious metals, commodities and equities.

One might say, “Well, so what? At least it keeps borrowing costs low.” Make no mistake about it; the Federal Reserve is redrawing the economic pie when it prints new dollars. That’s your economic pie too. Their share gets bigger as all outstanding dollars get smaller. Every single dollar in your pocket is worth less.

So what’s the goal? What could possibly be of such importance that it makes theft by the government an appropriate course of action? They have convinced themselves that it is your well being. The government has clearly outlined a strategy that is intended to save all of us from pain. Financial pain, to be more precise. To save us all from falling home values, equity values, incomes, etc., the government has embarked on a massive program to prop up all asset valuations.

But that’s good, right? Not exactly. The government cannot do this on its own as it has no funds. In order to do this the government must get the money from somewhere. The Treasury Department could borrow the money, but that would require messy Congressional approval for a number that is over 3 times the size of the stimulus package.

Instead, the Treasury relies on the Federal Reserve to do the heavy lifting, purchasing $1.7 trillion in assets so far, with another round of purchases estimated to be right around the corner. If the new round of QE2 comes in at the estimated $500 billion, then a full $2.2 trillion will have been printed out of thin air to prop up the rickety assets in the U.S. Feeling a little queasy yet?

Where does the economic force behind these new dollars come from? From savers, of course.  Everyone who has a U.S. dollar to their name pays the price. Each dollar gets hit, so the more dollars you have, the more you get hit.

We are in the middle of what could become the greatest forced wealth transfer in the history of the U.S. What happens when it doesn’t work? What happens when the Fed has printed $2 trillion plus and the jobs market does not pick up? Or companies don’t rush out to advertise in the help wanted section? Or individuals don’t charge up their credit cards or take on new loans?

We are already here. The Fed has spent approximately $1.7 trillion, and that’s on top of the U.S. government’s $700 billion to $800 billion stimulus, and unemployment is still hanging right around 10 percent. Credit outstanding in the U.S. is still falling. The overwhelming weight of deflation is still pressing on the markets.

At some point, the disconnect between the Fed’s stated goals and the reality of the economy will have to be recognized. Then the pain that the Fed was trying to avoid will descend on us anyway. Except, we will have squandered some of our purchasing power ahead of time, making the situation even worse than it would have been. Thanks for reading.



Nick Massey is a financial advisor and owner of Householder Group Financial Advisors in Edmond, OK.  Nick can be reached at www.nickmassey.com. Securities offered through Securities Service Network, Inc., member FINRA/SIPC.