Deflation Strategy – Part 2 of Discussion

There are not many, but a few, who have been adamant that The FED’s QE2 and QE3 programs were Macro mistakes, kind of kicking down the road mistakes.  One has to wonder how a mistake of this magnitude ends, what happens when this all unravels, or maybe more importantly what triggers the unraveling.  While the big economic picture in terms of employment and consumer incomes remain dismal, asset markets like stocks and real estate have seen big increases in value.

Many investors, while acknowledging that the FED programs did not accomplish what was needed, have been quite happy in riding along with the caveat that the key is to get out of the investments before everyone else gets out.  What is interesting is that what they are watching for is some indication by the FED that interest rates are going to move higher.  This is all based on another assumption, that the FED is in charge of developments.

In my opinion a number of things stand out that will make the decision process of dealing with the unwinding of QE a lot different from the wind up.  The first is, the FED will not be in charge, the second is that a number of factors will push the dollar much higher, a third is the potential of an unprecedented decline in the FED Balance sheet (percentage wise,  7 to 10 times greater than ever seen before), fourth is an unprecedented rise in the value of T-Bonds as safety will become the deciding factor, and the last is the Deflation and decline in asset values that will result, commodities are just the leading fringe.

Yesterday, we posted the first of a four part look by various economists on Deflation, more will follow.