Quantitative Easing and US Government Debt

The newest strategy being employed by the US Government to keep its economy from folding, Quantitative Easing, was announced in March of 2009. Here is the definition of Quantitative Easing taken from the June Sprott Report.

"Quantitative Easing was pioneered by the Japanese in the early 2000's. It is an extreme form of monetary policy used to stimulate the economy when interest rates are at or close to zero. In practical terms , the Federal Reserve purchases assets including treasuries and corporate bonds from financial institutions using newly created money. The Federal Reserve typically controls the cost of money using interest rates but because interest rates can't be negative, the Federal Reserve manipulates the quantity of money by printing more of it."

Since this was first tried by the Japanese, we can begin by looking at how successful it has been for them. The result of the Quantitative Easing for the Japanese is quite horrific. The Japanese economy has been stuck in the doldrums for the last 20 years or since the government began its quantitative easing program. Japanese Bonds are some of the worst performers in the world and as its population ages, there is not much stimulus in the near horizon. The chart below shows the yield of Japanese Government Bonds over the last 10 years.





In its report, Sprott outlines the debt obligations that the US Government will have in 2009. According to their numbers the government will have raise 2.041 trillion dollars to pay for its budget deficit of 1.845 trillion. They then looked at the biggest purchasers of US Debt or Bonds in 2008. The top five were: Intergovernmental Holdings(42%), Foreign and International Holders (28%), Mutual Funds (6%), State and Local Governments (5%). Sprott looked at what each of these holders of government debt were doing this year and discovered that all had lowered the amount of debt purchased this year and some were even sellers of it.

What does this all mean for us the investors? Well, to begin the current "green shoots" that popular media and government want all of us to believe are indicators of a economic recovery are not accurate. The US Government will have to continue to print more and more money to bail itself out and hope that the rest of the world won't notice the massive liquidity. Weakness in the US Dollar is pretty well a given and thus you can bet on hard assets priced in US Dollars continuing to increase in price. Stocks and US Real Estate may go up in price but in inflation adjusted terms they will continue to fall in value.

The third quarter has just begun and I am predicting that it will be a messy one for the US and World Stock Markets. Things have already started to turn around over the last few weeks and with today's poor job numbers, the writing is on the wall for a major correction or even worst crash in the market.

I have personally sold the majority of my holdings (especially those that have participated in the 40% rally in the market). I still hold some physical gold and gold companies. These may be next to go considering that if the market corrects, everything will get sold off. My number one holding will be Horizon Beta Pro fund that shorts the US Market. I will be putting my money where my mouth is. The other holding that I think will be quite prudent is CASH. This will allow you to get back into the market after the crash.