This is a busy time for a squid like me, but I thought I would outline what I think is going to be an interesting month.

On the macroscopic side we have the end of QE2 and the beginning of QE2.5. Just to be clear, QE2, roughly speaking, was the U.S. Federal Reserve purchasing treasury bonds (and I suspect other assets too). Before I knew much about how money works, I admit this sounds innocuous. However, in doing so, it puts money into the hands of the original bond holders and they, according to intent, will have to go out and invest or spend it. In doing so, the money supply increases.

I have always had a problem with these trickle-down sort of policies since they inflate the money supply and cause inflation if abused. Economies are complicated things, so if the Fed only buys small amounts of bonds sparingly, we could probably ascend an ivory tower or two arguing the M3-Inflation connection. However with the scale at which these purchases are occurring today, it leaves no doubt in my mind.

The thing that should really cook the goose of the little guy, however, is that inflation is far from libertine. It has to
start somewhere. Prices need to respond to something, and in this case it's those with that new money. But who are these 'those' I speak of? Generally the institutions who hold large amounts of this debt. When they allocate this new money the rise in prices begins.

It really is a nasty cycle if it gets out of hand. Why? Institutions with money drive prices. If people experience the rising prices before they benefit from this Fed liquidity they cut back discretionary spending demand wage increases and so on. The trickle-up demands can be as slow as the trickle-down cash. Leaving the Fed to wonder 'Why isn't anything happening?' as they turn up spigot more.

QE2.5 is just an attempt to keep money supply where it is. The bonds the Fed holds expire and turn into cash...(well not exactly but I won't bore you with the details) which, ideally, goes back into the same black hole that they were created from. To negate this, the cash is immediately deployed to buy new bonds.

QE_STEALTH (i.e. QE3) is assumed to be dead on arrival as a policy maneuver but remember this. During the famous 'Helicopter' speech before Bernake was 'Fed Head' he outlined several interesting ways to stimulate the economy without having to resort to bond purchases. QE_STEALTH, if/when it occurs, will likely be one of these. Watch out.

Now, I have ranted somewhat about the Fed, which is something I try not to do as there are many similar voices. However, June excites me for other reasons. I will go in to those in Part 2. I know I have a horrible record of saying "...continued in Part 2!" and then forgetting to write part two... but, as economists say "This time is different!"!
 

(Under the category of "What can do about this?!"... find a copy of Adam Fergusson's "When money dies." and read it. It's a history book that I some ways could be prophetic. While the actions of governments might be different, the effects on people and their actions, I believe, will not.)

A.

(Comments are always welcome.)