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Dislocations Ahead: The Ratchet Effect, Stick-Slip and QE3

From Charles Hugh Smith…

The Fed has galloped into a box canyon with no escape; no matter what it does, QE3 will “disppoint” the markets.

I think we can safely predict that “Quantitative Easing 3” (the next round of fiat money creation) will “disappoint,” triggering stock and bond market mayhem. Last week I noted that the U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve fiat/credit creation and manipulation.

In other words, the status quo is now completely dependent on the Federal government borrowing 40% of its expenditures ($1.5 trillion a year) and on the Federal Reserve printing fiat money and buying $1 trillion in Treasury bonds every year.

Now that Central State spending and intervention have ratcheted up to those levels, any reduction will destabilize the staus quo of zero-interest rates (ZIRP), unhindered entitlement and military/Security State spending, etc.

Thus we have politicos proposing $35 billion in “cuts” to a Federal budget ( $3.8 trillion for fiscal 2011) which has leaped up by hundreds of billions of dollars in a mere decade.

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