Comments on Todays Blog..... Nov. 17/2010

[tobyguy]

"This is a great surprise. The Fed has already begun purchasing Treasury bonds, as part of the quantitative easing ("QE2") program that was announced last week. What SHOULD happen is that the large Fed purchase should RAISE the price of bonds (by the law of supply and demand), and yields should go down. So what's actually happening is the OPPOSITE of what should happen."

How about people in general being so scared on putting there money anywhere else and are willing to forgo yields (actually, people have purchased US gov't bond at a slight loss, because they are basically so scared they are even willing to loose a little for safety). This ties well into the deflationary argument.

"Yeah, yeah, I know - the U.S. Government can "print" more money. The whole generational point, however, is that as the Boomers and Generation-Xers become more risk-averse, they're less willing to try dangerous experiments like "printing money."

Love the printing money argument... I'm sure they'll try anything to save their own bacon, at least eventually, even resorting to actually "printing money", but regardless, "printing money", if you can call it that, is hardly increasing the money supply.

What most people miss is that QE2 (or QE1 for that matter), do not significantly increase the money supply.
All the fed is doing is purchasing worthless holdings from banks, whose values would have imploded eventually and gone "poof" into nothing anyhow. At best it's neutral since when credit implodes, it too reduces the money supply. So holding up worthless holdings (eg. toxic assets, sub prime morgages, etc.), doesn't do much if anything at all to the overall money supply (it's more like money supply neutral).

Lastly, there's no point giving banks or anyone more money if they are scared to use it. The multiplier effect the fed is hoping for, is not going to happen because people are in cash and will remain in cash because they are scared to invest it in anything else (even when they get it from the fed in the for of QE).

Tobyguy