Thursday, December 11, 2008

Quantitative Easing

Federal Reserve Chairman Ben S. Bernanke’s indication that he will use “quantitative easing” to prevent deflation points to a stock market rally that may last for the next two years. With quantitative easing, a tool pioneered by the Bank of Japan, central banks can stimulate inflation by printing money and flooding the market with cash in order to encourage consumers to spend.

The trouble with this? The government’s efforts will eventually fail as ballooning government debt devalues the dollar, causes investors to flee U.S. assets, and takes the S&P 500 to its eventual bottom by 2014.

A false bear market will end as it begins to price in deflation. The results will be horrific. Remember, it is inflation that will most impact our daily lives (yes, even for those who lose their jobs).

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