Market Overview

QE3 Will Kill the Economy


If you told me that Ben Bernanke was a robot, sent from the future to destroy the United States, I would probably believe you. Then again, I expect robots from the future would be competent, which all but excludes Bernanke from consideration.

If you followed the Federal Open Market Committee's meeting minutes today, you probably walked away from it with the same conclusion that Benzinga's Jonathan Chen did — QE3 is coming. Let's look at the facts.

1: People tend to prefer "something" over "nothing", even when doing nothing would be the better course of action.

2: The Fed has to manage both unemployment and inflation. It would engage in QE3 if it felt that it could bump down unemployment without raising inflation too high.

3: The Fed thinks it has a lot of wiggle room on inflation; that is, they think they can do something, even if it raises inflation somewhat, because it is still relatively low.

4: The Fed knows it hasn't done enough to boost employment. It will try to do something. The only weapon it seems to have is QE3.

You add this all up and what do you have? QE3...or as I like to call it, an absolute disaster.

If QE3 were going to work to stem unemployment, why didn't it work for QE1 or QE2? Why would another round of the same expansionary monetary policies work to stimulate job creation in this country? The answer is that it wouldn't.

QE3 would do two things: inflate the economy and create cheap, temporary money. We might be able to handle a little inflation, on a macro level. I know my household would not like to pay another 4% for food and goods, but if the tradeoff were a more vibrant economy, I might be willing to accept that. After all, a vibrant economy would probably lift wages, reduce unemployment, fix some government funding problems, and so forth.

As for cheap money, well, QE3 would only serve to create asset bubbles. All that cheap money becomes awfully tempting, particularly when you can gamble it in the commodities casino and make billions. That's great if you're a commodities trader. It's not so great if you're anyone else.

The reality is that the housing crisis continues to be THE drag on the American economy. Everything else is secondary to that. Until we get the housing crisis under control, there will be no boom. There will be only busts and, at best, treading water.

Now, if QE3 is designed in such a way that it will fix the mortgage and housing crisis, then by all means, it should be implemented immediately. But I seriously doubt that such a plan could be constructed and implemented by the Fed. We could see such a plan from the government, but with Republicans blocking anything and everything the administration proposes, I don't see that happening, either.

The best thing the Fed could do at this point would be to leave the economy alone. Quit inflating it. Quit adding asset bubbles. Quit screwing around with everything, and let the market sort itself out. The Fed is not in a position to do any of the things that need to be done (housing crisis, bank regulation, massive stimulus spending) and so therefore should just get out of the way.

But of course, they won't. They'll do QE3...and in another 9 months, we'll have the same conversation about how stupid an idea QE4 is.

So, it appears that we're in for another round of commodity hikes, inflation, gasoline spikes, and no relief for the unemployed or those with underwater mortgages. The American economy is lost in the wilderness, and no one seems to care. Except, of course, the robot from the future, sent here to destroy it.

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