EnigmaDude (96.53)

I'm Sick and Tired of all the Lies and Obfuscation!

November 03, 2010 – Comments (3) | RELATED TICKERS: TLT

What QE2 Can and Cannot Do

There are a couple of interesting charts including one that dispels the myth of how quantitative easing leads to inflation.

Here are some important takeaways:

Currently, banks are allowed to borrow money from the Fed at an interest rate of 0.25%. Of course, the average American can't borrow at 0.25%, but the biggest banks can.

For the naive or uninformed, here is what the resulting effect will be:

With the borrowed money, banks buy Treasuries. Long-term Treasuries pay about 3.5%. This is a guaranteed profitable trade. Pay 0.25% - get 3.5%. There's no incentive for banks to provide risky loans to broke consumers if the government offers you a no-loss option.

Where do all the profits go? Look around! A rising tide lifts all boats.  Domestic stocks, international stocks, emerging market stocks, broad bond funds and commodities are all up (since QE1).

People may agree or disagree whether this is the right thing for the Fed to do.  Just because it worked before (QE1) does not mean it will work again now (QE2).  At least you should know what is happening so you can invest accordingly.