The Calm Before the Storm
An eerie calm
has descended upon world financial markets as they await perhaps
the two most important financial events of the year this week. On
Tuesday, investors will be eagerly awaiting the results of one of
the most anticipated midterm elections in U.S. history. On Wednesday,
the Federal Reserve is expected to end months of speculation by
formally announcing the details of a new round of quantitative easing.
If either the election or the meeting of the Federal Reserve open
market committee delivers a highly unexpected result, it could have
a dramatic impact on world financial markets. In fact, many are
looking at this week as a potential turning point for the U.S. economy.
The decisions that are made or not made this week could set us down
a road from which the U.S. economy may never recover.
At this point,
it looks like the Republicans
will take control of the U.S. House of Representatives and will
pick up a number of U.S. Senate seats as well.
There are many
in the financial world who already consider Barack Obama to be the
most "anti-business" president in U.S. history, so a defeat for
the Democrats on Tuesday would be greatly welcomed by many on Wall
Street. Barack Obama's decline in popularity since he was elected
has been absolutely stunning. According to Gallup, Barack Obama
had an average approval rating of
just 44.7% during the seventh quarter of his presidency, which
was a brand new low. In fact, Obama's average approval rating has
fallen during every single quarter since he took office. Things
have gotten so bad for Obama that one new poll has found that
47% of Democrats now think that Barack Obama should be challenged
for the 2012 Democratic presidential nomination.
the Democrats were able to do surprisingly well on Tuesday, it would
not only shock the political pundits, but it would also likely put
world financial markets in a very bad mood.
If the Republicans
do very well on Tuesday, it will likely mean that there will be
no more extensions for those receiving long-term unemployment benefits.
Some state governments are already anticipating this and are making
preparations. For example, armed security guards are
now being posted at all 36 full-service unemployment offices
in the state of Indiana. It is estimated that approximately
2 million Americans will lose their unemployment insurance benefits
during this upcoming holiday season if Congress does not authorize
another emergency extension of benefits by the end of November.
If the Republicans do very well on Tuesday, it would make it much
more likely that the extension will not happen.
But if millions
of unemployed Americans suddenly find themselves without any unemployment
checks, that is only going to cause the anger and frustration regarding
this economy to grow.
the unfortunate truth is that this election is not going to change
Over the past
five elections, incumbents have been re-elected to the U.S. House
of Representatives at an average rate of
This time will
be a little different of course, but not that much different. The
sad truth is that we are still likely to see about 80 percent of
the exact same faces going back to the U.S. Congress for the next
if the American people could somehow vote out every single member
of Congress, it would still not do much to fundamentally change
our economic situation because the U.S. Congress does not run the
economy and neither does the President.
Of course both
of those institutions can influence the U.S. economy, but it is
actually the Federal Reserve that runs the economy.
Reserve controls the money supply. The Federal Reserve controls
our interest rates. If the U.S. government wants more money it has
to go get it from the Federal Reserve. It is the Federal Reserve
that is tasked with the mandate of keeping unemployment low while
also keeping inflation at a "reasonable" level.
But these days,
Federal Reserve officials don't really seem to be that concerned
about the dangers of inflation. In fact, several top Federal Reserve
officials have come out in recent weeks and have made public statements
not only advocating more quantitative easing, but also suggesting
that inflation is not a danger because it is actually "too
low" right now.
In fact, there
have been some rumblings that many officials at the Fed would actually
welcome more inflation because they think that it would somehow
stimulate the economy. In fact, a Federal Reserve paper that was
released in September actually floated the idea that a spike in
oil prices would
be quite good for the U.S. economy.
And these are
the people running our economy?
Are we all
caught in an episode of The Twilight Zone?
Well, as far
as rising oil prices are concerned, the Fed will almost surely get
its wish. As
I have written about previously, the price of oil is almost
certainly heading to 100 dollars a barrel.
But if the
price of oil shoots up, isn't that going to cause significant inflationary
pressure on the prices of thousands of other goods and services?
very few of our leaders seem too concerned about inflation or about
protecting the value of the U.S. dollar these days.
In fact, now
even the IMF is publicly proclaiming that the U.S. dollar is "overvalued."
What a mess.
But there is
another aspect of a new round of "quantitative
easing" that the American people really wouldn't like if they
could actually figure out what is going on.
You see, the
truth is that "quantitative easing" is not only just a way to stimulate
the economy, it is also a way to give backdoor bailouts to the big
banks without having to go through the U.S. Congress.
a previous article, I described how this works....
The big U.S. banks have massive quantities of junk mortgage-backed
securities that are worth little to nothing that they desperately
want to get rid of.
They convince the Federal Reserve (which the big banks are part-owners
of) to buy up these "toxic assets" at significantly above market
The Federal Reserve creates massive amounts of money out of thin
air to buy up all of these troubled assets. The public is told that
all of this "quantitative easing" is necessary to stimulate the
The big banks are re-capitalized and have gotten massive amounts
of bad mortgage securities off their hands, the Federal Reserve
has found a way to pump hundreds of billions (if not trillions)
of dollars into the economy, and most of the American people are
none the wiser.
Now how do
you think the American people would feel about "quantitative easing"
if they really understood all this?
most Americans will be watching the election results on Tuesday
night without having even a basic understanding of how our economy
is really run.
are a ton of signs that the U.S. economy is heading in a very
bad direction, and dumping a handful of Congress critters out of
office might feel good, but it isn't going to do much to really
change our economic problems.
people desperately need to be educated about how our financial system
really works. But unfortunately, most Americans will likely not
wake up until the whole house of cards comes crashing down.
with permission from the Economic
© 2010 Economic