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Possible Positive Effects of Quantitative Easing by the Fed


I was researching  more today on the Fed.’s probable QE2 policy. I came to  wonder why no one has tied together a reasonable scenario for possible positive effects of this quantitative easing. I believe that the focus of QE2  will have several likely effects if and when successful. First of all, there is likely a positive correlation between the timing of the Fed.’s QE2 and: 1. the midterm election in the U.S., 2.the lackluster state of the current domestic economy ( pretty obvious ), 3. the recent foreclosure problems in the US, 4. the USA’s promotion of free-floating global currencies. There is no doubt in my mind that these 4 issues are positively correlated.

The Fed plans to use this blunt but powerful instrument known as QE2 to stimulate the domestic economy by effecting all four of these issues at the same time. This policy has the potential to take some of the mortgage-back securities off the books of the US Treasury, help the big banks better deal with the current housing foreclosure issues and slowly help the banks increase their lending. At the same time, QE2 can provide a fresh start ( or a new homeostasis ) for the currency valuations of countries around the world that have pegged their currencies to a benchmark (such as the US dollar ) and not allowed their currencies to float. Realistically, what can other countries do to retaliate? Probably not much. And lastly, just several weeks away from the US midterm elections, this policy may stimulate the financial markets and prove to be a ” shot in the arm ” for Democrats in the coming elections. I am not endorsing any political party here, just stating an opinion as to the interconnectedness that economics and politics sometimes have. We will see what happens.

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About Neven's Blog

My blog focuses on FINANCIAL MARKET ANALYSIS & INSIGHT from a macro as well as a micro - level point of view. The information is straight forward, honest, simplifies complex matters, questions some oversimplified matters, all while being as easy as possible for readers to understand. I primarily focus on capital and currency markets by combining insights, analysis & ideas from the fields of finance, economics and geopolitics.

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