What if you threw a party and nobody came, or at least not to yours

23 Nov

The Federal Reserve’s recent additional rounds of quantitative easing have been expressly designed to stir up animal spirits in domestic capital markets.  The problem with liquidity measures is you can not specifically target where this liquidity ends up. The party that the Fed is throwing here at home could very well end up spilling over into the neighbors yards (China, Brazil, etc.).  The result could be  that what heretofore has been a relative orderly decline in the dollar could very easily end up in a disorderly decline.  The massive exodus of liquidity elsewhere will not be up to the Fed and the alleged benefits of QE2 could very well end up as even stronger headwinds for the U.S. Economy in the form of higher interest rates, sharply higher commodity prices and an overtly protectionist legislative body.

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