QE 2 And You.

(This is a long post but it is very pertinent to one's life and is very interesting. At least read the first article linked and the one below by Ayn Rand.) This is very big news and will directly impact YOU not too far in the future by devaluing your dollar and savings by at least 10-20%. If you have a decent sized savings, you had better put it in an inflation protected investment, always a good advice. This is a great article to read to better understand the global monetary system from Mises dot org, it is long but will help you to understand the economy. The economy is slow and the Fed, America's central bank, is worried about deflation. Inflation is around 1.2%, the average rate of inflation is around 3%, and this is below their target rate of around 1.7-2.0 % which means we are experiencing disinflation, the rate of inflation is slowing. According to The Mises Institute, the Fed determines the rate of inflation by looking at the Consumer Price Index CPI which does not include energy or food prices among other things: "Besides nitpicking the construction of CPI data, there is the problem of focusing just on consumer prices in the first place. For example, according to the latest report of the Producer Price Index, in the last year prices for finished goods are up 4.0 percent, the prices for intermediate goods are up 5.6 percent, and prices for crude goods are up a whopping 20.3 percent." One of the reasons all consumer product's prices do not reflect this increase is that businesses are absorbing the cost of higher input costs at the moment as I concluded in this report(I could be wrong on this as I came to this conclusion myself.),

Procter & Gamble Co.'s (PG) fiscal first-quarter earnings fell 6.8% on the sale of its pharmaceuticals business last year, even as the company's margins took a hit from higher commodity costs.
Earnings topped the company's forecast. The consumer-products giant is in the midst of a broad push to grab market share around the world. It has launched products, marketed its offerings more aggressively and offered consumers more promotions. Higher raw material costs, however, are now putting more pressure on manufacturers. P&G competitor Kimberly-Clark Corp. (KMB) earlier this week reported that third-quarter earnings fell 19%, hurt by rising commodities costs.
Raw materials have started to pressure a range of companies from makers of pizza to sellers of paper towels. Pulp costs have been a pressure for Kimberly-Clark, which makes such brands as Kleenex tissues and Scott paper towels. BMO Capital Markets analyst Connie Maneaty noted that prices for a key variety of pulp are off their peak to $975 a metric ton, but still 12% higher than the average of $870 a metric ton from early this year. Kimberly-Clark lowered its 2010 earnings guidance this week, partly because of input cost pressures. P&G also makes a variety of paper products like Charmin toilet paper and Bounty paper towels. Companies like P&G also use a variety of plastics and packaging for the shampoos and lotions they sell. In the three months ended June spot prices for plastic resin were up roughly 20% to 30% from a year earlier, estimates Caris & Co. analyst Linda Bolton Weiser. "We are now seeing those costs flow through," she said. P&G on Wednesday didn't break out the impact of different commodities on its earnings.
Speaking to reporters, Chief Executive Bob McDonald said consumer demand is still "dampened" in the U.S. Some food companies in the U.S. are starting to raise prices, with General Mills (GIS) recently announcing increases on some cereal prices. P&G said it will push to offset commodity price pressures with cost savings rather than price rises, McDonald said. In cases where price increases are necessary, the company will choose to do so through the launch of innovative new products, he said. P&G has been curbing costs to offset the pressure from commodities.
Commodities aren't the only challenge these companies face. While developing markets continue to grow fast, sales on daily consumer goods in developed markets and especially the U.S. have stayed sluggish.

While inflation appears to be lower than what the Fed's target rate is, inflation is higher when counting a broader range of prices. Even though the broader range of prices are higher the Fed wants, they still want to implement a policy to increase inflation to meet its target rate for inflation.

To revive the economy and to meet its target rate for inflation, the Fed has decided to do a second round of quantitative easing, QE 2, to be followed by QE 3 and QE 4 according to Roubini who predicted the financial crisis and is fairly respected as he appears on business news networks and is watched fairly closely. Quantitative easing is where the Fed ties to increase the money supply in an attempt to jump start the economy. "The Federal Reserve will buy an additional $600 billion of Treasuries through June[2011], expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation." To buy back Treasuries, the Fed will be paying money for them. What will the Fed be paying for it with? Today, every dollar the government spends it must borrow over 40 cents of it. The Fed will be buying these Treasuries by printing money. The problem with the economy is not a lack of money out there as consumers, businesses, and banks are sitting on around 2 trillion dollars. This could be one of the reasons that inflation appears to be low, especially when considering the amount of money pumped into the economy during QE 1 which was around 1.7 trillion dollars as a massive amount of money is not circulating in the economy. The reason they are sitting on this money and not spending it is a lack of confidence. So pumping more money into the system doesn't seem to make sense and will only make inflation worse when all of this money that consumers, businesses, and banks are sitting on plus this 600 billion dollars start circulating in the economy. QE 1 and 2 will drastically increase the money supply. This in turn will increase the rate of inflation.

The recent action by the Fed is not making other Nations happy as this will devalue their investment they have made in the dollar by buying America's debt. I heard on CNBC's Squawk Box that the German Central bank called the recent action by the Fed "Clueless". And China is not happy with the Fed's action, "'As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,' Xia Bin, an advisor to China's central bank wrote in a newspaper managed by the bank."

Rush Limbaugh's take,

RUSH: By the way, folks, it is official. I told you this earlier in the day. I told you to be on the lookout for two things today, and it's not an accident the Fed meeting is today when everybody else is looking at the election returns. 'Federal Reserve to buy an additional $600 billion of long-term Treasuries by the end of the second quarter of next year.' QE2. They're not 'buying' anything. They're printing it. They are printing $600 billion, long-term Treasuries. Well, one of the primary uses of the money will be... (sigh) I don't know how to explain this. Just -- I'm telling you this is true. I can't give you the machinations for it. It's gonna end up invested at Wall Street, it's gonna end up invested in stocks, in businesses to make it look legit and okay. It's made to look like this is helping the economy grow. It's done so that Democrats can say, 'Look, look, our policies are helping the economy.'

Now, normally they run Wall Street down, they hatred, in favor of Main Street. Now all of a sudden they're gonna be looking at Wall Street. 'Look at the Dow Jones Industrial Average! Look at our policies! Look the growth of this economy! It's happening, it's just lagging, but we and our policies are bringing the country back.' That's what this is for. The money will end up in the stock market. You know what I'm gonna do? My job is to make the complex understandable, and I'm gonna do that in this case. I do not have the time here to explain the route that all this takes, but I will. For now, don't doubt me. This money is to do two things, the printed money. End up in the stock market to show growth there, and -- and -- to inflate the currency. That is the secondary purpose here, the beginning of the inflation-deflation cycle.

This is the fastest way to retire debt. When you don't have the ability to earn enough money to pay it off the fastest way is to inflate the currency. So this will allow the Fed and the regime to say that their policies are resulting in deficit reduction and savers. All of a sudden, by the way, you're gonna take it in the shorts here again. The money you've got socked away is gonna become worth less is that the regime can show the world that its policies are growing the government. So it is now official out there. QE2, Quantitative Easing, the printing of the money, is also another way for the Democrats to get control of Wall Street. "What do you mean, Rush? What do you mean?"

Wall Street's a bunch of welfare recipients today. All this money invested in equities, all this money invested in stocks, where's it coming from? It's not coming from John Q. Public. It's coming from Ben Bernanke. It's coming from the Federal Reserve -- and what they give, they can take away. Don't doubt me. That's why, folks, those of us who have been saying it having saying it: Last night [Nov 2] was just the beginning. Last night didn't solve anything. There's a long way to go. That's why don't be depressed. Don't be. Last night was a wipeout. Last night was such a wonderful event to build on. You may interpret what I'm saying as equating where we are to helplessness. I am not at all saying that. Don't misunderstand me. Yes, there are large forces, powerful forces. They don't always win.

This action by the Fed and the overall global economic situaiton is causing people to predict "doom and gloom".The US government does not have enough money to retire its debt so it will try to inflate its way out of it by just printing money. This action has lead to the comparison between America's current situation with that of the Weimar Republic where they tried the exact same thing and which eventually ended up with Hitler. I don't know if these two events can be accurately compared. Glenn Beck thinks that the world's current economic situation is leading to the collapse of the dollar followed by a "new global order". Will this just end up like the Carter years? I don't know. Were people making the same dire predictions during the Carter years as they are now? We had the Carter years and America is still here.

Continuing on the vain of some "new world order" resulting from the current economic situation, this from the 1st article above and first published in 2005,

It is now all too clear that the world has become fed up with the unprecedented inflation, in the United States and throughout the world, that has been sparked by the fluctuating fiat currency era inaugurated in 1973. We are also weary of the extreme volatility and unpredictability of currency exchange rates. This volatility is the consequence of the national fiat-money system, which fragmented the world's money and added artificial political instability to the natural uncertainty in the free-market price system. The Friedmanite dream of fluctuating fiat money lies in ashes, and there is an understandable yearning to return to an international money with fixed exchange rates.

Unfortunately, the classical gold standard lies forgotten, and the ultimate goal of most American and world leaders is the old Keynesian vision of a one-world fiat paper standard, a new currency unit issued by a World Reserve Bank (WRB). Whether the new currency be termed 'the bancor' (offered by Keynes), the 'unita' (proposed by World War II US Treasury official Harry Dexter White), or the "phoenix" (suggested by The Economist) is unimportant. The vital point is that such an international paper currency, while indeed free of balance-of-payments crises (since the WRB could issue as much bancors as it wished and supply them to its country of choice), would provide for an open channel for unlimited world-wide inflation, unchecked by either balance-of-payments crises or by declines in exchange rates.

The WRB would then be the all-powerful determinant of the world's money supply and its national distribution. The WRB could and would subject the world to what it believes will be a wisely-controlled inflation. Unfortunately, there would then be nothing standing in the way of the unimaginably catastrophic economic holocaust of world-wide runaway inflation, nothing, that is, except the dubious capacity of the WRB to fine-tune the world economy.

While a world-wide paper unit and central bank remain the ultimate goal of world's Keynesian-oriented leaders, the more realistic and proximate goal is a return to a glorified Bretton Woods scheme, except this time without the check of any backing in gold. Already the world's major central banks are attempting to 'coordinate' monetary and economic policies, harmonize rates of inflation, and fix exchange rates. The militant drive for a European paper currency issued by a European central bank seems on the verge of success. This goal is being sold to the gullible public by the fallacious claim that a free-trade European Economic Community (EEC) necessarily requires an overarching European bureaucracy, a uniformity of taxation throughout the EEC, and, in particular, a European central bank and paper unit. Once that is achieved, closer coordination with the Federal Reserve and other major central banks will follow immediately. And then, could a World Central Bank be far behind? Short of that ultimate goal, however, we may soon be plunged into yet another Bretton Woods, with all the attendant crises of the balance of payments and Gresham's Law that follow from fixed exchange rates in a world of fiat moneys.

From the entire article above, it does seem like the status quo in the global monetary framework can't last and a "new global monetary" order would seem to solve these problems with the current one. I don't think you can ascribe any nefarious schemes to these developments. Although I do question the foundations that this new system is being set up on, if there is such a thing. Going back on the gold standard does not seem like a possibility as of now.

Another good article about the overall structure of the economy is "Egalitarianism and Inflation" by Ayn Rand. I read this article about two years ago and after taking a macro economic, reading my textbook, and gaining a better understanding of the economy works I found this article to be an accurate description of the how the economy works.

Inflation is a man-made scourge, made possible by the fact that most men do not understand it. It is a crime committed on so large a scale that its size is its protection: the integrating capacity of the victims’ minds breaks down before the magnitude—and the seeming complexity—of the crime, which permits it to be committed openly, in public. For centuries, inflation has been wrecking one country after another, yet men learn nothing, offer no resistance, and perish—not like animals driven to slaughter, but worse: like animals stampeding in search of a butcher. [...]You have all heard of some manipulator who does not work, but lives in luxury by obtaining a loan, which he the repays by obtaining another loan elsewhere, which he repays by obtaining another loan, etc. You know that his policy can’t go on forever, that it catches up with him eventually and he crashes. But what if that manipulator is the government.

Inflation eats up a nations stock seed or capital that makes future production possible.

The overall situation of the U.S. economy according to Senator Gregg,

Sen. Judd Gregg warns that the United States could end up in dire financial straits like Greece's in a few years if it doesn’t cut its deficit and debt — and quickly.

The federal government and state governments are facing massive debts moving forward. States alone are looking at unfunded pension shortfalls for police, emergency, and government workers totaling between $3 trillion and $5 trillion during the next two decades, the Economist magazine reported recently.

'This nation is on a course where if we don’t do something about it, get federal situation, the fiscal policy [under control], we’re Greece. We’re a banana republic,' Gregg told CNBC.

'Our status as a nation is threatened by what we’ve got coming at us in the area of deficit and debt. And it’s only a few more years, at the most, that we have to work with here before the market says, ‘Sorry, your currency is something we cannot continue to defend.'

Senator Gregg is only one of many voices echoing the very same warning. A lot of my posts on the economy details this. The fact is that [IF], the key word is if, America and the world doesn't make a major change in its economic course, there will be a major world economic upheaval in the future. To what extent the upheaval will be and how the world will react to this is up in the air.

The bottom line: the stock market will likely be boosted in the sort term, inflation will be a very serious problem in the not-to-distant future and it already is with the rise in commodity prices, the U.S. Dollar could decline another 20% , and this action is more of the same bad policy that will set up the eventual global economic correction/collapse to be even worse than it otherwise would have been. This new policy is simply trying the very same policy, QE 1 after the economic downturn of 08, that failed earlier. This is BIG news for those that care about their economic future as this will further exacerbate the current global economic situation, and it would do you well to become more educated on this and the overall economic situation so that you can position yourself to succeed in the future. Or you can just ignore it and, uh, fall on your face like everyone else.