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John Mauldin David Galland article

John Mauldin David Galland article

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Published by: richardck61 on Apr 12, 2011
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05/03/2011

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The End of QE2: Major Policy Shift Ahead
April 11, 2011
This week’s Outside the Box is from my friend David Galland, an interview he did for 
The Casey Report,
and it represents a philosophical train of thought more in line with Austrianeconomics and libertarianism than my own. But if we only read what we already think, then howdo we learn? It is only when your ideas are challenged and you must determine why the other guys are wrong and you are right, that you can either become more firm in your beliefs, or change. And much of what David says in this interview resonates. (I wrote about the end of QE2a few weeks ago.)The guys at Casey are natural resources, commodities, and precious metals investors. YetDavid argues that cash might be the wise thing now, after pounding the table for years on gold.He believes that the end of QE2 will be more important and dramatic than most think. That it iscoming to an end I have no doubt, so it is important to think about what the effects, if any, willbe. There are those who argue that we can live without it now. I argued (and still do) that weshould have never had it. The unintended consequences are the ones I worry about. We just don’tknow. It was a crazy experiment, with no understanding of what would really happen. Buthoping for the best is not a strategy, so let’s think about it. David provides us with some differentways to look at the process.You can subscribe to
The Casey Report 
at a 20% discount for my readers,right here.And for those who want to read more, you can get a free subscription to
Conversationswith Casey,
which is a weekly e-letter delivered directly to your inbox every Wednesday.Contrarian investor and financial bestselling author Doug Casey talks about the economy, themarkets, politics, society, and anything else that matters in life… a fireworks of informative,controversial, and entertaining viewpoints from one of the most original free-market thinkers of our time. Occasionally CWC will also feature interviews with Casey editors or “outside experts”on current market moves or important economic or political events. If you don’t like libertarianthought, be warned. You can subscribehere.Last, a housekeeping item. I “fat-fingered” my inbox and lost about a hundred emailsfrom the last three months or so, which I planned to get around to, but now they are buried inabout 25,000 deleted files. (It’s what happens when you don’t touch-type and have to look at thekeyboard. Yes, I know…) One way to clean out your inbox I guess, but if I owe you something,you might want to drop me a note again.Your already buried with 75 new emails in a few hours analyst,John MauldinEditor, Outside the Box
 
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The Casey Report’s David Galland: The End of QE2: Major Policy Shift Ahead
(Interviewed by Louis James, Editor,
International Speculator 
)
Editor’s Note:
David Galland, Casey Research partner and managing editor of 
The CaseyReport 
, sees a major shift in Federal Reserve policy ahead and has advice on how to investaccordingly. Time is short, so we’ve asked David to share his thoughts with us.
L
: David, in recent editorials you’ve warned of what could be an important shift in Fed policy – can you fill us in?
David
: Sure. The purpose of 
The Casey Report 
is to keep subscribers well positioned inpowerful, long-term trends – the kind of trend that will keep giving and giving. The trend inprecious metals – gold and silver – which we’ve been heavily recommending for ten years is agood example. The overarching goal of 
The Casey Report 
is first and foremost to identify thosecritical larger trends and then closely monitor them until they play out – which is another way of saying that we aren’t big about market timing or jumping in and out of trades. I mention this toset the context for the coming shift in Fed policy.
L
: And that context is?
David
: That the shift, and it is imminent, will not change the larger trend, but it has the potentialto be quite disruptive over the short term.
L
: Explain.
David
: In terms of the larger trends, the fundamentals that have caused so much pain andeconomic woe over the last ten years or so remain intact. If anything, they’ve gotten worse.We’ve gotten currency debasement, not just in the U.S., but especially in the U.S. dollar, whichis not just any currency, but the world’s reserve currency.We’ve got a truly mind-boggling expansion of the reach of government into all aspects of societyand the economy, with all that that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth. By recognizing this destructivetrend for what it is, investors can position themselves to avoid the worst, and to profit by bettingon things like the continuing debasement of the dollar.So that’s the big picture.There is growing evidence that in the next month or two, we will head into a very dangerousperiod. The Fed has been extremely supportive of the U.S. government’s insane spending,
 
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polluting its own balance sheet by buying up toxic loans by the hundreds of billions and bypumping enormous quantities of cash into the money supply.You don’t have to look very hard to understand why we have seen some small recovery in theeconomy, much of which has been driven by the financial sector that has been the recipient of somuch largess – it was bought and paid for by the government, working hand in glove with theFed.But there is about to be a fundamental change in this arrangement. It appears that the Fed hasdecided that it’s time to take a step back from its monetization – or quantitative easing (QE), asthey now term it – in the hopes that the market will step in to fill the large gap it will leave.They can’t know how that’s going to work out, but if they don’t stop pumping money into theeconomy, they never will know if the quantitative easing has worked.Based on a lot of statements from a number of the voting members of the Federal Open MarketCommittee, the change just ahead is that they are serious about stopping QE in June.As they won’t wait until the last minute to confirm the end of their Treasury buying, I wouldexpect their intentions to be made clear following their end-of-April meeting, the full minutes of which should be released in early May.
L
: To be clear, do you mean no QE3, or that they cancel the portion of QE2 they haven’t spentyet?
David
: They may leave themselves a bit of wiggle room by holding back some of the fundsslated to be spent as part of QE2, in the hopes of demonstrating a high level of confidence intheir decision to stop the monetization.That would also give them a bit of powder to use should the need suddenly arise, withoutexceeding the mandate of QE2. The important point is that I am increasingly sure they won’t justroll out QE3, and that will have consequences.
L
: Are you saying, no QE3 at all?
David
: No. I think there will be a QE3, but it won’t materialize until after a relatively lengthyperiod during which the Fed stands aside in order to give the market the opportunity to adapt andadjust to their exit from the Treasury auctions. In other words, once they stop, I wouldn’tanticipate them jumping right back in at the first sign of trouble – say, if the stock marketcrashes.In time, however, as the ponderous problems weighing on the economy come back to the foreand return the economy to its knees, the Fed will be forced to reinstitute the monetization, thoughthey will likely try to come up with a moniker other than quantitative easing to describe it.
L
: You’re as cheerful as Doug. Why are you so sure there will be a QE3?

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