Wednesday, January 22nd, 2020 MST

An interesting parallel 

Although the Fed denies that it has begun QE4, it continues to inject freshly printed money into the markets, supposedly to keep the fed funds rate in the FOMC desired range of 1.5% to 1.75%.  The Fed used three QE programs to avoid an economic crash in 2008.  Still, the 2008 crisis is commonly referred to as the Great Recession.

These injections are being done through repurchase agreements and a sixty billion- dollar monthly direct purchase of  treasury bills.  Under repurchase agreements, often referred to as “repos,” the Fed accepts collateral with value more than the funds being credited to the borrowing bank’s account.

With the $60 billion monthly purchases, the T-bills are added to Fed’s balance sheet as assets.  The T-bill purchases alone will total $720 billion over a year, all money being “created out of thin air,” as are the funds used for the purchase of repos.

Stocks reacted favorably to the news of the Fed’s continued “accommodation to Wall Street,” with the Dow Industrials, the NASDAQ and the S&P 500 reaching new all-time highs.  Meanwhile gold traded at $1470, holding on to most of its gains this year.  At the end of May, gold spot was $1280.

Also possibly contributing to the stocks’ gains was the news that Trump “signed off “ on a so-called phase-one trade deal with China, which will cancel the December 15 new tariffs on about $160 billion of consumer goods from China.

In return, China promised to buy more agricultural goods from the US.

While the terms have been agreed to in principle, the legal text has not been finalized.  This is about the seventh or eighth time that China and the US have agreed to conditions that eventually failed to be enacted.  If this one falls through, look for stocks to collapse and for gold to rise.

Now, I find it interesting that 100 years ago Germany’s Weimar Republic began its money printing spree that collapsed its currency, the Papiermark, in four years.  Do not look for the dollar to collapse in four years.  It is the world’s reserve currency and will take much longer to fail.  In 1919, there was no “world reserve currency.”  No, wait, there was a worldwide acceptable currency.  It was gold, which survived quite well.

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