Well I wasn’t in the know when Quantitative Easing (QE) 1 (Mar 2009 to May 2010 – $1.25 trillion in mortgage-backed securities from banks) and QE Lite (September 2010 – $300 billion – reinvest the proceeds of maturing mortgage-backed securities into Treasury bonds) occurred, but was well aware that QE 2 (November 2010 to July 2011) was happening and that the FED would buy $ 600 billion dollars worth of treasury bonds. So though Chairman Ben Bernanke stated on June 3rd 2009, that “The Federal Reserve will not monetize the debt”, he guaranteed that the FED would not create new money out of thin air to buy government bonds. But that is what has happened with QE 2, as explained simply in the below animated 3-minute video entitled ‘Federal Reserve Debt Monetization Explained’.
Since the start of QE 2, I have heard from many people that I follow that QE 3 will happen. The first of which was Jim Rickards, who during an interview with Eric King of King World News believed that the FED would secretively do it using the revenue from maturing debt from its balance sheets. The next time I heard about the possibility of QE 2 continuing was during a James Turk presentation at the Sound Money Conference [38:43-41:23] in January 2011, where he displayed a slide from his presentation [page 80] that showed the correlation of the FED monetizing to the S&P 500 Index. The slide clearly shows that the stock market is being carried by the constant money printing of the private Federal Reserve.
I then heard from my favourite economist/investor Peter Schiff who believes that the US financial system would crash if the FED ends QE, which he first stated in the May 17th episode of his Schiff Radio show, where he said, “There was a period of time where people looked at weak economic data as a positive, because it meant that QE 2 would continue and the FED would not cut it short. Now, I guess that mindset isn’t there any more, people are thinking the economy is weakening, the FED is going to end QE over the summer, which means we are headed back to recession. … What I think traders don’t understand, is that Ben Bernanke is lying. QE 2 is not going to come to an end. In fact if it did, we wouldn’t just be headed for a recession, we would be heading to depression. We would be headed for bank failures bigger than 2008, which is the reason that I’m so convinced that it ain’t gonna happen. The market correctly understands the economy is slowing down, but they don’t understand just how dependent it is on QE 2 and how it will not just slow down, but fall off the edge of a cliff, if it ends. … As it becomes obvious that the economy is weakening, low and behold the FED is going to come out and say ‘Oh no! Who knew about this. I guess we are going to have to do QE 3’ or QE 2.0 or whatever they are going to call it, but its going to happen.” [2:48-8:20]
He then went on to say, “The problem is that if they [FED] started selling their [treasury] bonds, the value of their bonds would collapse and they couldn’t even sell enough. Because lets say they say that the bonds are worth par, we need to sell a trillion dollars worth of them. The minute they start selling them, they are not worth par any more. Maybe they are worth 80 or 70 cents and the problem is that when the biggest buyer becomes the biggest seller, the market implodes, especially for their mortgage paper [mortgage backed securities]. Think about all the toxic crap that the FED has bought up over the last couple of years, what happens if they try to sell it, whose going to be dumb enough to buy it. The only one dumb enough was the FED and that was because they didn’t care, because they just printed the money. … So the FED wont be able to sell down its balance sheet, because it wont be able to get any money for its assets. And that’s another reason to understand that QE 2 is not going to end. We have made a permanent commitment to endless money printing. That is why I think everything implodes. Now I do believe that at some point they might do the right thing, but they are not going to do it until there is massive economic pain, we are not there. I see no reason to believe that its not going to be business as usual at the FED, which is print, print, print.” [15:37-17:11] “The economy is slowing down. The economic numbers are getting worse and the FED is still doing QE. So what’s going to happen as the FED pulls the rug from underneath the economy just as it needs it the most. Of course it doesn’t really need it, … the bubble economy needs it, not the real economy, and so the markets are going down. … Maybe the FED is so stupid, maybe Bernanke and the guys up there are so clueless that they think they can remove QE 2, maybe they think they can. I don’t think they are that dumb. I think by now they gotta know enough to know that this economy is completely on life support and ending QE 2 is pulling the plug and the economy will die. … They care about maintaining the illusion through the 2012 election cycle and they will not do that if they stop QE.” [65:14-66:29]
As you can see in this CNBC Fast Money episode on the 26th of May 2011, Peter says, “The FED is going to do QE until there is a crisis. People have said that QE is like the training wheels, and now the bicycle is moving along on its own, and its time to take the training wheels off’. Well the FED knows that QE isn’t the training wheels, its the only wheels and they’re not going to take it off. The problem is that were bicycling towards the end of a cliff, we need to take those wheels off.” For more discussion about the issue from Peter, you can check the May 19th [4:52-9:27], May 20th [45:15-47:10] and June 10th [24:11-27:08] episodes of his radio show.
I then heard about QE 3 from Marc Faber when he said on CNBC’s Squawk Box, “We may drop 10-15% [in the S&P] and then QE3 will come, and QE4, QE5, QE6, QE7, whatever you want. The money printer will continue to print, that I am sure. … I think Mr. Bernanke doesn’t know much about the global economy, but he watches probably the S&P everyday. … Temporarily they [FED] probably stop to test the markets, how the markets react, but afterwards I would fully expect more quantitative easing. There is nothing else they can do actually. … Until very recently, the FED has had very few critics. … Over the last few months, alot of critical comments have come up about the FED and its money printing habits. But I bet you, [if] the S&P drop 20%, all the critics will be silenced and they would all applaud renewed money printing. Sadly, Sadly.” [4:14-9:48] So as the FED is the treasury bond buyer of last resort, with PIMPCO, China, and Japan not buying, the bond market would collapse if nobody else steps in to continuously buy up the bonds that the FED has been buying. The FED has been buying up 70% of the treasury bonds that have been issued during QE 2 and if they don’t continue with their money printing to buy government debt, the US economy will be in the toilet. So be ready for more debasement of the US dollar and keep buying the only non-debaseable money of gold and silver.
For those wondering where all the 600 billion dollars worth of new printed money went, Zero Hedge has recently come out with an article stating that it all went to foreign banks that had access to the FED through there branches in New York.
Quantitative Easing Explained [7 mins] – Animated two bunnies discussing what QE is
Explanation of Fed Monetizing US Debt [7 mins] – Glenn Beck talks about it
The National Debt Crisis [8 mins] – Mini-documentary by VisionVictory
Fate of Gold and Silver in QE3 [3 mins] – TheStreet.com talks with David Morgan
Prepare for More Money Printing: Analyst – CNBC
“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”
Bill Gross: who will buy Treasuries when QE2 stops?
Bill Gross of PIMCO is concerned for the US government. To him, the big question is who will buy US Treasuries (i.e. lend to the US government) once the Federal Reserve stops buying them through its second round of quantitative easing (QE2). Previously, the Federal Reserve bought 10 percent of the Treasuries issued, foreign central banks bought about 50 percent, and the private sector (funds and banks) bought the remaining 40 percent. Now, with QE2 in full swing, the Federal Reserve is buying 70 percent of Treasuries issued in this period while the foreign central banks are buying the remaining 30 percent.
Peter Grandich on Manipulation
“I’m no fan of Bernanke, but at least he showed his cards right up front. When QE1 and QE2 were put in place, he openly stated on several occasions that it was his goal to put enough money in the system to get asset prices rising on the assumption that if the stock market rises a lot and people start to feel good, they go out and spend money, and companies have to hire people, etc. I certainly disagree with it, and I think we’re going to pay the price for all the money that he created.”
“To note just a few, QE2 ending would cause a spike in interest rates, banking crisis, and inevitably a debt crisis that would lead to a dollar crisis. Unfortunately for those living in America, the extension of more QE, a QE3 will only delay the inevitable and actually make things much worse in the end. QE3 will signal to the world that there is no hope for the U.S. to ever manage its debt crisis, an admission that our economy is propped up by fiat magic money, and global price inflation will occur as a result of an increase in the global reserve currency.”
PIMCO’s Gross tweets Fed will curb Treasury yields
The world’s largest bond fund manager said on Twitter late Tuesday: “QE3 likely to take form of ‘extended period’ language or interest rate caps on 2-3-year Treasuries.” Gross, the co-chief investment officer of PIMCO, the world’s top bond manager, also said on Twitter: “Next week’s Fed statement will likely stress ‘extended period of time’ language or even a period of interest rate caps.”
Why the “Is QE 3 Coming?” Debate is a Moot Point Pt 2 – Zero Hedge
End of the…QE2 Program on June, 30 2011 – International Business Times
The Federal Reserve will not monetize the debt – Two Plus Two Poker Forums
The Federal Reserve Will Not Monetize The Debt? – The Market Ticker
China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills – CNSNews
Why QE2 Failed: The Money All Went Overseas – Ellen Brown / Huffington Post
It Ain’t Money If I Can’t Print It! – Peter Schiff