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March 19, 2009 | By: Trace Mayer |
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Quantitative easing; everybody is doing it, like the Bank of England, Japan and even Switzerland. Quantitative easing is a tool of monetary policy. The effect is an increase in the quantity of currency without regard to maintaining its quality. Quantitative is relating to, measuring, or measured by the quantity of something rather than its quality. On 18 March, 2009, Bloomberg reported that the Federal Reserve announced its intent to purchase $300B of longer-term Treasuries. Predictably, the Federal Reserve has decided to exacerbate the quantitative easing party.
What is really going on is the great credit contraction. The system does not collapse but evaporate. As the evaporation has continued and intensified, capital--both real and fictitious--has sought safer and more liquid assets by moving down the liquidity pyramid. A significant, but still miniscule amount, of capital has already evaporated over the past year. This is basic economic law being asserted. A predictable consequence has been for Treasury rates to near 0% because they are considered among the safest and most liquid assets. (click on chart to enlarge)
But the United States Treasury bubble is the biggest of all and there are reasons how and why the Treasury bubble will burst.
At all times and in all circumstances gold remains money. Gold is the ultimate form of payment and is always accepted. Gold is the safest and most liquid asset. As I surgically explained, the ETFs GLD and SLV are NOT gold or silver. The question then becomes: Will capital move up or down the liquidity pyramid?
How did gold perform in reaction to Bernanke’s announcement? A monstrous and almost immediate rise of about $60 per ounce (click on chart to enlarge). The gold cartel GATA must have had its hands full yesterday. This is all the more ominous because gold is not just a commodity or portfolio asset but a currency which, through tools like GoldMoney, can be used in ordinary daily transactions. Because silver is also money, the chronic silver backwardation is equally if not more ominous (click on chart to enlarge).
I have long asserted that the FRN$ will be the last major fiat currency to evaporate in the great credit contraction and that gold will still be there when the next credit expansion begins. This misguided action by Mr. Bernanke will only hasten the rate of evaporation. The great credit contraction has just begun and in the aggregate, capital will continue moving down, not up, the liquidity pyramid.
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