David Morris

We’ve just seen an incredibly significant week for the financial markets. Following the US mid-terms, the Republicans have control of the House of Representatives and have cut the Democrats’ Senate majority. While the new Congress won’t be in place until January, the Republican gains will influence the debate over the Bush tax cuts; the markets are pricing in a partial extension. Before that, the current policymakers have to decide whether to extend the emergency unemployment compensation (EUC) – a temporary measure set to expire this month. If it does expire, then 2m Americans lose their benefits from the end of November.

The FOMC’s announcement of further QE had a sharp and violent effect on asset prices as the dollar plunged. Adding a fresh $600bn to the reinvestment of maturing mortgage-backed securities (MBS) gives a monthly injection of around $100bn until the end of June. Once these electronic ledger entries hit the trading accounts of the primary dealers, they will be leveraged up and hosed at anything with a half-decent yield. With the Fed’s stimulus leaking into emerging markets, those countries with trade surpluses are seeing their currencies soar, which undermines their competitiveness. Understandably, the Fed came under fire from China, Germany and Brazil.

In an article for the Washington Post, Fed chairman Ben Bernanke wrote that rising equity prices are part of a virtuous circle that boosts wealth and confidence, leading to increased spending and economic expansion. So, QE gives the illusion that all is well because stock prices are rising. They certainly are in dollar terms, but not when valued in gold, the world’s true store of value, and the ultimate medium of exchange. Consequently, there are an increasing number of investors who feel the Fed is playing nothing more than a shell game with counterfeit money.