QE 2

If you take one look at the above picture, courtesy Reuters,  just ask yourself one question – why should you see something like this in the US when Mr Bernanke the  money printer is very well alive and kicking. That guy, [ I mean the one in the picture  ]  could simply borrow cash and then forget to pay back, as US banks love to write off loans knowing very well that President Obama and Fed Chairman Bernanke are more than willing to bail  out banks that are on the way to going bust.  If pronunciation of the Fed Chief's name is a problem then just call him QE - that's pretty simple, cool and true.

What precisely is QE -  the term means quantitative easing and it has been going around lately in the US in a big way. It is a big term, but it’s meaning is pretty straightforward: to artificially increase the money supply. The increase in the money supply is an attempt to inject liquidity into the economy. The idea is that the liquidity will spark investment and consumption amongst the population.

How Effective Was Last Year’s QE 1?

The Fed purchased $1.25 trillion in mortgage assets last year. The theory was that injecting money into the economy would cause banks to take that money and lend it, jump-starting the economy and bringing us back into a normal recovery

So, what happened to the trillion-plus dollars?… It went back onto the balance sheet of the Federal Reserve, i.e. banks put it back into the Fed… If banks are not lending now, with what seems like lots of reserves, then what is to make us think that another $2 trillion in QE2 will make them feel like they have too much money in their vaults? But we folks should understand one thing very clearly :businesses don’t want to borrow all that much because of the uncertain times, will easy money make that any better? As someone said, “I don’t need more credit, I just need more customers.”

QE2. -  Many on Wall Street were hoping for the Fed to announce a plan to buy up to a trillion dollars in government bonds, or at least make mention of it. Others hoped nothing would be said and that the idea of QE2 will begin to fade away.

The Fed released this statement concerning pumping more money into the economy, “The committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Though a second round of stimulus will make the stock market go higher, politically it isn’t beneficial for President Obama or the Democratic Party to implement it. Americans are tired of the stimulus packages and don’t want the Fed to print more dollars. With November elections around the corner I believe the Fed will hold off in doing anything unless the economic numbers significantly weaken in the next two months.

And by the way, I won't be shocked if you have already started wondering whether the Sensex will  kiss 25000 if QE2 happens.

  

Kishor S. Khot, [Kishor@hbjcapital.com], Equity Strategist, HBJ Capital Services Pvt Ltd