Ramification of Fed's Quantitative Easing Policies: Debase the Dollar

Albert Einstein said, "Insanity is doing the same thing over and over again and expecting different results. Well, Mr. Bernanke, you are insane. Quantitative Easing (QE), which is just a fancy name for printing money, has not worked; and your next QE II phase will be an absolute disaster.  Just look at Japan's failed experience with QE over the past decade. the only thing that it will accomplish is to further debase the dollar.

To make matters worse, QE has artificially kept interest rates low. The ten-year Treasury Note is currently yielding 2.55%.  How?  Well, the Federal Reserve System, through its Federal Open Market Operations, has purchased something $1.5 trillion of dubious, quality assets at par from the banking system.  In return, those banks have used the proceeds to purchase high-quality Treasury securities. Banks love it, because they have been able to unload questionable assets at par and receive Treasury securities in return.  In other words, the Fed has not only propped up the balance sheets of banks but also assisted the Treasury in monetarizing our federal deficits.  So, what is the problem?  The problem is that such a policy has weakened the dollar to the point that it may decline another 15% or more. (See the following dollar chart.)

Let me put it into perspective with this example.  Let's say I am a foreign buyer and holder of Treasury Notes at 2.55%.  If the dollar declines, say another 15%, I have just lost 12.45% (2.55% yield minus 15% currency-exchange lost) on my Treasury Note investment.  If the dollar continues to decline (As I am writing this post, the dollar is down 15  and Euro is up 1.33%.), the Treasury just may not find any foreign takers willing to finance our federal deficits through the purchase of Treasury securities.  That will just leave the Fed to monetarize the federal deficits at the expense of an ever decreasing dollar.