Cash injections into the markets - What's it all about?

The Press seems to be getting confused about all the money that's being pumped into the worlds' financial system. Money is going into two distinct areas --

A) The Banks - to try to prevent a meltdown in the banking system
B) Economies - via tax cuts, public spending projects, etc., in the hope of stimulating economies to reduce the severity of the recession.

The banking crisis is less acute at the time of writing, with the interbank lending rates a bit lower than it had been. We are by no means free of risk, however. Not only is there potentially a lot more bad news to come (nobody knows for sure) but as the recession bites this will put strain on the banks. The recession has barely started biting - only a very small proportion of ordinary people have yet felt any significant effect on their lifestyles.

Pumping cash into the banks to prevent their collapse was essential. The problem is the way in which it was done. Pumping money into economies to lessen the effects of recession is a very old and largely discounted technique originally put forward by Keynes in the 1930s. The problem is that these vast sums of money - hundreds of billions of dollars - are being dumped into schemes that will make people spend it quickly with no lasting benefit to individuals, society or the infrastructure. In the UK there is talk about massive road and military projects but those are just the headlines - the bulk of the money is planned to be given to the poorest who will spend it quickest - on anything! The Government doesn't care, as long as it is spent quickly. History shows that this is seldom very effective and it destroys wealth.

The question facing us is "How will the markets react?" Markets are fickle and especially at this time they are so volatile they don't factor in genuine trends - to this extent free markets are serving us very badly right now. The serious, long-term, investors are not going to impressed at all this window dressing. Short term speculators are going to respond positively to hundreds of billions being dumped into the economy to pump it up.

I see the decline on the world's bourses continuing - the decline has a long way to go - for many months but the unprecedented cash transfusions will exacerbate the usual bounces on the way down. This is a day trader's dream though volatility will be terrifying and margin requirements could be high.

The dollar is going to turn soon - it has gone far too far, too fast. When it does, it could move down at astonishing speed. We are in completely uncharted territory, beware!