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The End (of QE) Is Near! Run For Your Lives!

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August 25, 2009 – Comments (2)

A couple of days ago, I read an article “How To Trade Using Game Theory” on SeekingAlpha. I had to figure out what “game theory” is, and also “quantitative easing” (QE), since QE is at the heart of this article.
GAME THEORY postulates a finite number of players, choosing strategies that is most advantageous taking into account the actions of other players
QE is simply the Fed increasing the money supply by buying up Treasuries, thereby flooding the banks with cash. Then, in theory, the banks increase lending and interest rates go down.

I did not agree with everything in the article (the portions which I understood), but he has a good point: QE is ending next month. What will happen then? He postulates that the increase in money supply is behind the rallies in stocks and commodities. This would also explain the fall of the dollar: increased supply = fall in exchange rates. Does an end to QE foretell the collapse of stocks and commodities, and also a stronger dollar? I wonder.

2 Comments – Post Your Own

#1) On August 25, 2009 at 8:08 PM, cdulan (90.60) wrote:

Chill out. How effective has QE been so far?  Marginally effective at best.

Deflation will be the main driver in Q4 and Q1 2010 so it will not be needed any more.

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#2) On August 25, 2009 at 8:49 PM, QualityPicks (57.90) wrote:

I have to say, that Bernanke has found so many ways to inject money into the economy that almost nobody can keep track. He may stop the buying of treasuries, but he is not stopping all of the other programs that provide "money" and liquidity to the banks. We will see if he really stops it though, I have my doubts.

While there are really strong Deflationary forces, there are also really strong inflationary policies being set by the Fed and the Government. Bernanke is aware that he has to keep them for as long as he can or we will relapse.

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