As you can see by the chart to the right, the Dow had yet another 'Fed Interventionist Week'. Wednesday was the day the Fed announced the injection of yet another trillion into the economy in the form of Treasury bond buybacks and collateralized mortgage securities purchases. Added to the trillions already devoted to the cause of Dow Jones Industrial Average support, my unofficial count has us north of $10 trillion pledged so far. Coming next week, Treasury Secretary Geithner unveils his plan to welcome private investors into the 'toxic asset' ownership club. Gee, with an entire country drowning in bad debt, what we really need is more bad debt. Have aliens secretly captured this guy and scooped his brains out with ladle? I am aware that this process has already been done on the average American as they still support the actions of newly elected fleece team. It is sad to see the destruction of America right before our profoundly stupid eyes.
What people don't realize is a trillion dollar injection by the Fed is not a trillion dollars. It is really 10 trillion dollars. They buy the bonds from lenders who currently own the bonds who then lend with the power of nine. The lenders loan 90% of the new cash and then 90% of that new cash and so on until the injection has reproduced exponentially. Zimbabwe has already tried this tactic. It didn't work.
Why won't it work now? Who will take on the loans? I don't know if Bernanke ever reads a newspaper or not but apparently he doesn't understand that America is broke. We already have all the debt that we need to drown ourselves with, thank you very much. Nevertheless, I think there are two things going on here. One, the printing press has begun to put pressure on our Treasury bond yields resulting in higher interest rates. The recession has lessened our appetite for goods from China who in turn, have less of a need to balance their trade with US bond purchases. In turn, our rates rise and our recession gets worse and we buy less Chinese made stuff and so on. The US has wanted the Chinese to let their currency float higher but they won't because that hurts their exports. Latest figures show their exports are falling at a 25% clip. So, our Fed has taken the bold move to buy down our Treasuries themselves. This should weaken our dollar which in turn strengthens the Chinese currency in relative terms. However, our leaders have never understood that the Chinese peg their currency to ours so if we just put our own economic house in order, things would take care of themselves. But, that won't happen. We prefer the artificialness of intervention, injection, lying about everything, and complete governmental control of everything including executive pay. So, Bernanke now thinks he can manipulate currencies around the world while he is at the core destroying America's economic system.
Secondly, buying Treasuries is an attack on the banks. With the Fed Funds rate at zero, the banks can borrow at zero and buy Treasuries yielding 2 or 3 percent and make money all day with no risk whatsoever. Why should they ever loan a dime to anyone and take on risk? So, the solution is to bring the yields of Treasuries back down. As I have said in the past few years, sometimes stupid works for you. We will soon have mortgage rates at 3% and the Fed will subsidize the whole program. Ain't stupid great? Of course, it seems incestuous and ridiculous that the same body that issues the Treasury bonds to pump 'stimulus' money into the economy is at the same time buying them back. Let history show the truth.
So for the week, the Dow gained a tad on the one-hour fed-induced rally from Wednesday. The simple truth is that the market knows the economy and the markets are only going to be strangled by a fumbling government who knows nothing about anything except cheating on their taxes and screwing the American public. If we cannot push beyond 7500 in the first few days of next week, we will be talking about holding on to 6000 in a week or so. Ignorant people vote for ignorant leaders. We can't print our way out of our demise. Nor can we spend our way out. And worse, we can't lie our way out. The previous White House Occupant (the WHO) tried all of this on a grand scale and the current WHO came to power on a pledge of change. I don't see any change nor did I expect any. Engaging more than one brain cell at a time will lead one to this conclusion. The market will always right itself if it is left alone. This market won't be. Keep your shorts in your top drawer. You will need them shortly!
Stock charts courtesy of StockCharts.com