The possibility of the U.S. once again dipping into recession has become an increasingly legitimate concern as of late. In fact, many believe that recessionary times have already come upon us due to the global economic slowdown. Even in emerging markets such as China, growth has stagnated as of late, with Chinese inflation down in August. This speaks to the downturn in global industrial production, which has directly contributed to a decline in copper prices. Overall, the week of 9/19/11 has marked the steepest decline in major U.S. equity indices since October of 2008, which took place in the thick of the credit crisis. It now seems as though the Europeans are experiencing an imminent credit crisis of their own that will reverberate overseas. The lack of direction exhibited by European financial leaders has been disconcerting to say the least, as they have essentially ignored the urgings of Treasury Secretary Tim Geithner to expedite recapitalization of large banks across the Euro Zone.
In the commodities market, gold, which has served as a safe haven for investors in these uncertain times, has declined precipitously in the past two days with a $100 dollar decline on Friday. Hedging against inflation is no longer a concern due to the dip in global industrial production, which has adversely affected gold prices. It seems as if the gold bubble may finally be ready to burst, but whether that will actually occur in a bear market remains to be seen. Capital outflows into Treasuries and the U.S. dollar will now likely take place as an alternative in the near future. The recently announced Operation Twist has been met with virulent Republican disdain, particularly from leading GOP candidate Rick Perry, who in August claimed that printing more money would be "almost treasonous". While Operation Twist doesn’t involve expanding the Fed’s balance sheet and printing additional money, it is quite clear that Republicans are dead set against any additional Fed activity. It is fair to assert that monetary policy, specifically QE1 and QE2, undertaken up to this point has been largely unsuccessful. Due to the Banking Act of 1935, the Federal Reserve is no longer allowed to borrow money directly from the Treasury. Instead, it must purchase Treasuries from private banks. Since 12 of the 20 largest undisclosed bids to sell a total of $600 billion dollars worth of Treasuries came from European Banks, most of that money is now in foreign possession. This certainly doesn’t bode well for the U.S. recovery, and it has contributed to the ineffectiveness of QE2.
