late 2010, a sentiment has developed in the US markets that the FED will shield the US Stock Market from any overwhelming collapse. Its solution to print as much money as needed until conditions return to normal. As the 197o’s showed, this is a mistaken belief. The piper to be paid is inflation.
Inflation? What inflation?
A look at the FRED graph shows why inflation is not an issue at the moment. US Banks are depositing the bulk of QE funds with the FED. But if the unemployment problem is to be solved, banks have to start to lending and that is when the FED will face real problems. (For a comment on the most recent Unemployment numbers see Cooking the Books).
All this is without taking Europe into consideration.
Looks like the probability of Greek defaulting has risen to over 70%. From public comments, it seems that we are now relying that since Greece is ‘old’ news, contagion won’t occur. There is probably some basis for that belief. But, even if contagion is averted, the Italian problem won’t go away. I have always believed that Italy will be the break point for Europe.
The ECB has opted to move into ‘back-door’ QE. It now finds that if it is to ’save’ Greece, it will have to take a loss on the bonds it bought. But so far, it is resisting taking any of the 70% loss it is asking other bond holders to take. That does not augur well for the future.
