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The Fed announced QE 3.5 just a couple of weeks ago and yes, they were true to their word.  They have already purchased $20 billion worth of MBS (mortgages).  Of course we were told that this is not “monetization,” they are only doing this to help out the real estate market by keeping rates down.  But, you must look a step or two further to find out the real meaning of QE 3.5 or any other QE for that matter.

In this instance, they are buying mortgages because they are such a “swell” organization and have “our” best interests at heart… NOT!  What do you think happens when the Fed takes the various smelly and decaying mortgages off of the banks hands?  The banks receive what in return for the mortgages?  Well, cash of course!  Freshly printed and still has that smell of copy paper you so loved when taking quizzes in grade school.  …And the banks do what with this fresh and now liquid cash?  They buy newly issued Treasury bonds, notes and bills!  PRESTO, new demand for Treasury auctions so we can just keep on going down the road like nothing has happened!

But, something has happened and something is happening, the Fed’s balance sheet is getting bigger, more “money” is floating around the system and lo and behold, the federal deficit grows as does our total indebtedness.  A very “convenient” way around Mother Nature’s laws where the lack of demand would push rates higher and constrain borrowings.  Ingenious!

Meanwhile, Spain’s bank “stress tests” were just released and they are short a supposed 49 billion Euros…horse cocky on this one!  Depositors have taken something like 100 billion out just over the last few months.  But, the number was “bad enough” to hit the Euro and give the Dollar a boost which is what has all boiled down to.  Even though the Dollar has rolled over and heading downward, it must have some bounces and short covering rallies along the way.  These are aided by Euro news and MSM spin.

It’s a dangerous game when all horses in the race are crippled and you’re forced to bet on the “least bad” which is what FOREX is all about.  The “leakage” where bettors refuse to bet on the least bad is finding it’s way into the metals.  The corrections have been shorter and shallower which shows real demand for real metal.  Speaking of real metal, India is introducing Silver contracts to settle in kilo bars, the debate as to whether the Silver market really is tight or not should be decided shortly!