The thing I found the most alarming in the Fed's defacto announcement of QE3 is that they didn't put a ceiling in place. They just said that they were going to buy $40 billion in MBS per month and let it go at that. For size comparison, a year of that or $480 billion dollars, is about a third of our annual deficit but since congress has not passed an actual budget since 2009 in order to maintain plausible deniability, it's hard to know what the real deficits are. The Fed has been buying our debt for quite some time, they recently admitted to buying 61% of our debt last year, but this isn't exactly buying our debt. It's really an incredible wealth transfer from the people to the banks. The banks are the ones who will benefit. But it could also lead directly to the collapse of the economy.
To begin with, an MBS is a Mortgage Backed Security. These are the generally recognized cause of the '08 crash, and the crisis in derivatives that's still there. (See here ) H/T to WRSA for a link to Jim Sinclair's MineSet where Sinclair explains it all in "QE3 to Infinity- the Final End Game". Let me try to extract some of what he said, while keeping it short. Seriously, RTWT, it's not that long and quite good.
- OTC derivative manufacturers and distributors sold fraudulent paper to almost every entity as clients of the Western world financial system.
- ...when Lehman was forced into bankruptcy it broke the "Daisy Chain"...The problem has no practical solution other than transferring all losing paper to the balance sheet of the Federal Reserve where then it was anticipated no non-government "mark to market" audit would ever occur. It was the perfect hole to stick the junk.
- The size of the OTC derivative market was $1144 Trillion dollars. That's many, many times Gross World Product. That's according to the BIS, who reduced this to $700 Trillion by using a different accounting scheme. It's still several times GWP.
- In the first and second round of QE the Federal purchased OTC derivatives including the securitized mortgage debt to remove them from the balance sheets of the Western world financial system, thereby improving the Western world’s financial institutions balance sheet and preventing an international industry wide bankruptcy. That means the Federal Reserve has impaired its balance sheet in order to repair some of the balance sheet integrity of the Western world financial system.
- That didn't work, so now the Fed is applying QE to infinity to try to rescue the world financial system. It is a move with terrible possibilities in front of it.
- As QE3 to infinity moves ahead, the balance sheet of the Federal Reserve continues to acquire worthless paper in exchange for dollars. Junk moved onto the balance sheet of the US Federal Reserve as the common share of the USA, the US dollar, continues to expand exponentially.
Bayou Renaissance Man has a good roundup of stories on this.
I'm fond of saying that infinity is a really helpful concept in math, but pretty useless in the real world. The banking system created a make believe world to pass around money to each other, and their connected customers, to be honest. But it was based on infinite growth, which can't exist. Like a game of musical chairs where all of the chairs got removed while the group was up, there is no safe place to sit. This is not going to end well. But it is going to end.