Tuesday, June 16, 2009

Bad Debt is QE-light

QE is a program that creates and distributes money. It roughly works this way: the FED presses a button and creates $1T worth of 'money' in a computer. They give those 'money bits' to people holding US treasuries, they buy their own debt. They replace UST by USD. USD is redeemable at any time on any good anywhere in the economy. USD is "money". USD floods the market. Note that the economic output has not changed (at least not yet), you just have a larger portion of 'money' making claims on it. So the share we all get is lower and, equivalently, the numerical price on goods goes up, that is monetary driven asset inflation. That is the stated purpose of the FED QE program.

Then think about bad debt. Debt that goes bad. I give you 100, you give me back 20. That's bad debt of 80. Ultimately the 80 just isn't there. But the money is gone, it is in circulation. In the case of QE, there ARE NO assets at all, it is just a claim that is not justified by work or production. Neither was there, at least not at the level advertised, in the real estate boom. People took out mortgage at 100 for houses now worth around 70. It was greed and naive hopes of free lunches. There are no free lunches.

So at the end of the day, what do we have, we have dollars that are floating in the system, free of claims they will not get repaid, private dollars ultimately (think of all the private label MBS that flooded the market) and they are not backed by anything of material value in the real economy. If this private money trades at 20% of face value, it means that the dollars floating around only have 20% of their claim value accounted for. QE has 0%.

Bad debt is at 20%, QE at 0, all the money is just created out of thin air. It is orchestrated theft.

But someone gets shafted. Mainly the poor. If you have assets and the prices go up, you float. If you don't then the numbers go up but not your income necessarily. You get priced out. I experienced this in silicon valley when I couldn't pay rent any longer. Then obviously all the bond holders that are on fixed-income. The elderly, savers, foreigners, a lot of US citizens.

Consider it a tax to bail out the economy, because that is exactly what it is.

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