The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage
By Noble DraKoln, CTA, Liverpool Capital Management
NEW YORK (
) -- Forget May 21, 2011, the loudly prophesized end of the world. Ignore the centuries-old Mayan doomsday prediction of Dec. 21, 2011. Instead, look nearer and dearer to home. June 30, 2011 -- a day that will go down in history as the day the Federal Reserve Board stopped printing money.
On June 30, 2011 one of the most successful stock manipulation schemes, next to Madoff, will end -- no more Quantitative Easing: Part 2. This sophisticated chicanery is the culmination of three years of consistent indoctrination by the
The Federal Reserve has made it clear, only they can save the United States from itself. Unfortunately, as with many self-appointed saviors and prophets, present and future, many outrageous claims were made. They would save homes, stimulate the economy, and bring the United States back to glory in one fell swoop.
Unfortunately, the first one fell swoop didn't work. In Nov. 2008, the Federal Reserve insisted that it would be our savior by absorbing $500 billion dollars worth of mortgage-backed securities and $100 billion in
debt. This didn't work. In March 2009, once the stock market hit rock bottom, the Federal Reserve attempted a second "one fell swoop" by injecting another $850 billion into the economy by purchasing more mortgage-backed securities, and Fannie Mae and Freddie Mac debt -- but with one small twist: they would add a $300 billion long-term Treasury notes and bonds to their shopping spree. Yet this still didn't work, so in Aug. 2010, it was set in stone by Ben Bernanke that another round of purchasing would save the day, Quantitative Easing Part 2 (QE2).
The plan was simple, ZIRP the lending, QE2 the economy to stimulate buying, and the VIX will be just fine. In layman's language; make sure the interest rate stays at zero (z.ero i.nterest r.ate p.olicy), use the Federal Reserve money to purchase $75 billion to $80 billion dollars a month to buy government bonds, from third parties, this would "stop the slowing of inflation"(QE2), and reduce the level of the volatility (v.olatility i.nde x.) found in the stock market. This was all done to solve a problem that didn't exist yet, but was assumed to be on the horizon. Of course, this was all for our own good.
So the question is, why has the Federal Reserve decided to forsake us?
The loyal followers of the QE stimulus packages have made out like bandits. Wall Street insiders have profited from the Federal Reserve effectively printing money. Banks have been posting huge gains primarily because of the zero interest rates, and their goal to "stop the slowing of inflation" has been achieved even greater than they expected. So what's the problem? It doesn't work. It effectively robs from the future to put a band aid on the problems of today.
Japan took the same approach in the early 2000s. In order to curb the "slowing of inflation," or deflation as they rightly called it, they pioneered the concept of "quantitative easing." Driving down short-term interest rates to zero and putting excess liquidity in the hands of the commercial banks has done nothing to end their decade-long recession. Many argue that it has made it worse in Japan. Yet, every country around the world is attempting to use the same proven failed strategy to rescue its economy.
As with any act of saving, there must come sacrifice -- whether it's the sacrifice of yourself or the need to sacrifice another to achieve your goals. The messiah or savior complex is defined by the dictionary as "a state of mind in which there is a belief that they are, or are destined to become, a savior." That is why the messiah complex is considered so dangerous. There is often an outright ignoring of the facts to achieve this end.
The activity of the QE2 and the interventions before it, have crippled the purchasing power of the dollar by more than 30% in the past 10 years. It has contributed to a significant new stock bubble because investors have had to run and put their money in aggressive investments such as commodities and stocks -- because bonds have been effectively neutered. This has all culminated in a flight to safety to gold and silver, creating a 10-year gold bull market, higher commodity prices, and a weakened economy that simply cannot stand on its own.
The everyday people have not been saved. Job growth is stagnant, home sales are weak, shadow inventory of homes exist, and the day-to-day expense of simply driving and eating has aggressively gone up. Yet the Federal Reserve's solution is to walk away on June 30, 2011. With the geopolitical unrest, weakening of the European Union, Greece's recent downgrade, and the United States national debt of $14 trillion dollars and counting, the question quickly becomes "is it fiscally responsible to end QE2"?
Is it really time for our self-appointed savior , the Federal Reserve, to abandon us and leave us to our own devices and more importantly, what does that look like? Is there a realistic alternative monthly buyer of $80 billion in Treasury notes? What will interest rates really need to be in order to attract that level of activity? If interest rates increase, does that mean a flight from stocks? Can inflation spike even higher, like it did in Japan, when QE spending stops? Who bears the brunt of it all? Can precious metals continue their bull run or is the flight to safety quickly going to become the new risk bubble?
June 30, 2011 is without a doubt one of the most important dates this year. It is the date that we will be left with so many questions, so few answers.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.