Why QE3? Because Bernanke Says 25 Million Unemployed is a Tragedy
- Posted by Jeff Carter
- on September 1st, 2012
Yesterday, Fed Chairman Ben Bernanke said that the Fed would probably engage in another quantitative ease. This is the third time since 2009 that the Fed has engaged in a radical maneuver to stimulate growth in the economy.
Except it never works. All it does is devalue the money that you have, and artificially inflate the prices of hard assets you own.
Chump reporters yesterday parroted the, “Dow Jones Industrial Average was up on the news yesterday by 90 points.”, without thinking about why. The reality is the Fed is out of bullets and yesterday’s announcement will do nothing to stimulate the economy. If you haven’t been watching, Japan has engaged in continuous quantitative easing since the 1990′s. They call it the lost decade over there but it’s more like the lost economy.
In a quantitative ease, the Fed buys US Treasury Debt of different expirations and injects actual cash into the economy. Banks that hold the treasuries sell them to the Fed, and receive the cash. Ideally, the banks will turn and lend that money out to businesses at a low interest rate.
The problem with the strategy is there is no economic growth in the broad economy. The Fed is fighting massive headwinds out of its control. China is in trouble and we all know about the European situation. So businesses don’t demand the cash from the banks, and the banks simply reinvest the cash in the US Treasury market. There is no velocity of money turning over through the economy.
But here are some real world effects when the Fed announces a policy like this. Some markets ignore supply and demand fundamentals because of the devalued dollar. For example, prior to the announcement the December Lean Hog contract ($HE_F) was trading around 71.05. It was trending lower on the day, and that makes sense because farmers are responding to the drought by culling hog herds and sending a lot of them to market for slaughter. But the end of the day, the hogs rallied 100 points. Pure QE effect.
Another market people like to look at is gold. ($GLD, $GC_F). Yesterday post announcement gold rallied hard. Over 45,000 futures traded at CME. ($CME). The stock market had huge volume yesterday after being lethargic for most of the month. E-mini S&P futures ($SPY, $ES_F) traded over 2M contracts. That’s $100 billion in notional value.
Quantitative ease will do nothing to help anyone in the US without a job. No business is going to hire because the Fed is buying back debt and creating excess cash. Without real prospects for growth, business doesn’t have an incentive to expand.
Bernanke is quoted as saying that “the benefits of QE outweigh the costs”. He is wrong. He also made the observation that there hasn’t been any inflation caused because of previous QE’s. He is right about that. The reason there is no inflation in the US economy today after all the monetary stimulus the Fed has engaged in over the past three years is that there is no economic growth. GDP is flatlining. If we had real growth, we’d have inflation because the velocity of money would flow through the economy.
There is no benefit to quantitative ease except you feel richer than you really are. When looking at the costs, the Fed also needs to total up all the damage that it has wreaked on retirees that are living on a fixed income. Most of them have investments tied to an interest rate instrument and have been devastated by Fed action over the past several years. The other people that are hurt are savers. People sitting on cash in checking and savings accounts. Their cash suddenly got worth less than it was yesterday.
The Fed is out of bullets. The only thing that can stimulate this economy is a change in fiscal policy. A fiscal policy change, can cause a change in economic equations businesses use to calculate the difference between expanding and doing nothing. Obama and his administration have regulated business to such a high extent, they choose not to grow. Many choose to go out of business instead of bearing the brunt of higher regulation.
25 Million unemployed is a tragedy. It’s a tragedy because back in 2009 if we had engaged in the correct fiscal policy we wouldn’t have that many unemployed today. It’s a tragedy because instead of using the right fiscal tools to correct economic problems, the government used the wrong tools and blew the deficit out of proportion to GDP growth.
The last three years we have used Sesame Street economics to solve some very tough problems and everything has been an abject failure. That is a crying shame.
thanks for the link Instapundit.
Thanks for the shout out Powerlineblog.
Thanks Ed Driscoll for the link.
Welcome to Doug Ross readers and thanks for the link. (like your photos of the Obama visit to Louisiana. Click the link and check them out)
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)
Tags Cloud#eastwooding Alaska APEi Bill of Rights Bowdoin College Business and Economy Connecticut Cowork Dan Seals debt crisis Drachma Economic numbers EU FASB Flags of Our Fathers Graphics Interchange Format Gun help desk Housing illegal immigration Insurance Intellectual Property Ismail Haniyeh Jack Lew japan nuclear reactor JD Job creation program John Maynard Keynes Kyle Bass LeBron James Military academy Nuclear Accident Obama Re-Election profits Recreations Republican Presidential Debate Robert Sesame Street Economics Siskel Supplemental Nutrition Assistance Program The Color of Rain Trending and Popularity Ultraviolet Walt Ehlers Wisconsin
Becker Posner Blog
Ben Horowitz Blog
Betting the Business
Black Line Review
Both Sides of the Table
Business News Network
Chicago Booth Graduate School of Business
Cooler By The Lake
Daily Economic Release Calendar
Doug Ross @ Journal
Economics of a POW Camp
Foundation for Families
Garden and Gun
George Stigler Institute
Good Beer Hunting
Hyde Park Angels
Illinois College of Business
John Taylor's Blog
Legal Issues in Angel Funding
Macroblog-Federal Reserve Bank of Atlanta
Microbrews in Chicago
Mike And G
Milton Friedman Institute
National World War Two Museum
Notes From Underground
Ronald Coase Institute
Senate Banking Committee
Take A Report
The Big Picture
The Clubber Fund
The Daily Crux
The Grumpy Economist
The Jack B Show
The Minimalist Trader
The Musings of The Big Red Car
The Polsky Center
The Streetwise Professor
Tough Love Marketing
US Federal Reserve Bank
US House Financial Services Committee
World War Two Blog