QE3 Strengthens Yuan While Devaluing Dollar

Just to recap, the Federal Reserve is now pumping cash into the money supply at a rate of $40,000,000,000 a month (that’s forty billion) and buying mortgage-backed securities with the fresh cash. These are derivatives (bets) on home mortgage packages.

So in other words these potentially toxic assets (underwater mortgages) are being bought up by the Fed to strengthen the value of mortgages. In other words if the mortgage derivative market collapsed it would likely collapse the value of homes. You might also think of it as the powers-that-be directly protecting and extending our current way of life.

But pumping cash into the U.S. Dollar is the definition of inflation, which can also be described as devaluing the dollar. Understanding this is as simple as understanding supply and demand… the more rare a desirable thing the more it’s value increases. So as the money supply increases the more the buying power of each dollar decreases.

So while the dollar declines the Yuan appears to climb in value, improving the prospects of the Chinese currency becoming a de facto reserve currency. This would crush the U.S. Economy.

China’s yuan climbed Friday to its highest level against the U.S. dollar since the currency was revaluated in July of 2005, buoyed by the U.S. Federal Reserve’s recent QE3 program as well as data this week showing that the People’s Bank of China injected a record amount of cash into the financial system, according to analysts. – MarketWatch.

So on one hand, Washington D.C. is seemingly trying to protect the world’s reserve currency status of the U.S. Dollar by attacking any nation (next up, Iran) that trades for oil with something other than the petrodollar – and on the other hand they print U.S. Dollars wildly, forcing the value of the Dollar down and weakening it’s desirability as a reserve currency.

Why? I don’t now. I won’t go there.

What I do know is that these policies are doing two things that can’t be obscured.

  1. We’re being led to war with Iran and possibly China and/or Russia. Yes a world war.
  2. The U.S. Dollar is at risk of becoming worthless. Why? Paper (fiat) currencies are only valuable because people agree they have value and use them for trade for things that have real value like commodities (food, water, shelter, security, etc). If people (or markets) decided that a currency has low or no value then the commodities themselves would likely become the new preferred form of trade. Gold and silver would also rise in value exponentially in this scenario.

Since I have no idea why the powers-that-be would risk these two things, I simply have to assume that these outcomes are not only on-the-table but increasing in risk daily as the war drums beat in Washington D.C. and the Fed’s presses roll.

QE3 – Bernanke Throws Gasoline on the Fire!

So here we are, QE3. Many of us watching this slow motion train wreck have been wondering when this big milestone would be reached.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40bn per month.” – Fed launches QE3: the full statement – Telegraph.

I’m a bit surprised that the freshly printed money is being used to buy mortgage-backed securities. Tossing more money at these derivatives just seems like throwing gasoline on a fire to me – a very bad sign me thinks.

By the way, I really love this photo of Bernanke! It really shows his mad-scientist side well.