Contrarian Position on the Fed and QE2

As the stock market awaits with bated breath, economists and big fund managers are chiming in with their opinions on QE2. Their consensus? That QE2 won't work. That it will cause more inflation than the Fed wants.

It's one thing, I think, when non-MSM financial blogs like Zero Hedge warn us the ultimate futility and disastrous consequence of QE2; quite another when it is the MSM consensus.

It is possible that this is one of the rare incidents when the majority is correct.

So, what is the contrarian position to this majority? Naturally,

• QE2 will work; and
• QE2 won't cause higher inflation.

QE2 will work? Now I think about it, it may work. Not for the "economy" that the Fed is supposedly helping, but for the financial institutions, again, just like QE1. For the TBTF banks, it will be good to have additional $1 trillion or more as "excess reserves" at the Fed, in preparation for the MBS blow-up to come.

QE2 won't cause higher inflation? To the extent that the increased excess reserves are unlikely to flow into the real economy. But the size of excess reserves does seem to matter in signaling the "inflation expectation". But then, "inflation" that matters to the Fed is the core CPI that excludes energy and food, which at this point are the only things that struggling middle-class and working families may be buying.

What's the implication for the stock market? We're about to find out the first reaction in less than 20 minutes.

As I said yesterday, no one, nothing can legally stop the Fed right now.

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