Saturday, November 27, 2010

European Debt Crisis & Republicans Negating Effects Of QE2

After two months of strong inflationary tendencies in the markets, with the U.S. dollar prices of Treasuries, stocks, commodities and foreign currencies all rising sharply in anticipation of the new round of "quantitative easing", we have in November seen these prices fall back after the actual implementation of it. Why is that?

There are several reasons for this. One is that the markets likely engaged in over-shooting and this is a correction from this. Another could be that increased Republican opposition to the Fed's inflationary policies makes markets believe it to be more unlikely that Bernanke and the other in the FOMC will dare to implement more "quantitative easing". A third reason is that the debt panic in Ireland and others are increasing demand for dollar assets.

All of the above mentioned reasons imply a higher demand for money in America, something which has a similar effect as a lower supply of money. This has been partially, but only partially as we have seen, cancelled out by a continued increase in money supply.