Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ben Bernanke and QE3

Interest-Rates / Quantitative Easing Feb 07, 2012 - 03:44 AM GMT

By: Michael_S_Rozeff

Interest-Rates

Best Financial Markets Analysis ArticleBen, if you and the other members of the FRB are thinking of the factors that I shall mention, then you are likely not to do QE3 any time soon. If not, then, on your own grounds of economic thought, I believe that you are making a mistake.

My general argument is that the risks of QE3 outweigh the prospective gains, on your grounds, not mine. (My preference is no central bank and free banking and/or privately produced money and credit, but I am laying that aside in this article.)


My specific arguments follow.

First, using your data, the unemployment rate is falling. It is a lagging indicator. This suggests that the economy is recovering. Other indicators suggest the same, including the stock market and the money supply, even though one can always find contra-indications.

It stands to reason that the economy is in recovery mode because it is over 3 years since the 2008 collapse and recession was evident even earlier than that. Since there have not been any serious shocks to the economy for awhile, it is naturally recovering.

The risk to the FED is that you will use up your ammunition when you do not need to. You need your ammunition for the next time that the economy sinks.

Second, if inflation ignites, then interest rates on debt will rise. The government deficit will rise sharply. The government will be in a lot of trouble.

You cannot take the risk of this happening because your only tool will be to support government bonds by purchases. The markets probably will not look upon this support as benignly as in the past.

But if you do QE3, you risk setting off inflation as well as enhanced expectations of inflation, and they will themselves cause inflation. You risk it because the economy is already recovering.

Third, money supply is rising very sharply, at 20 percent rates. This indicates recovery and it also indicates a higher inflation potential.

If QE3 is done at this time, the rate of increase of money aggregates will be so high that they may cause expectations of inflation to rise sharply higher. Bond yields will rise, and the government will face higher rates and financing stringency.

Fourth, QE3 risks setting off another speculative cycle as in the past. To halt that, you'd have to tighten. But that would raise borrowing rates for the government. This is a risk you want to avoid. A related consideration is simply that it's a reasonable time in the economic cycle to allow more market discipline so as not to ignite another speculative cycle.

Fifth, QE3 risks undermining the FED's credibility on inflation. The FED hasn't exited from its earlier QE programs. It's actually time overdue to build up FED credibility. QE3 now goes in the opposite direction and risks losing it.

Sixth, there is really no strong reason for QE3 at this time.

Seventh, QE3 is per se risky in the sense that there is no strong evidence that it will accomplish much of anything in the real economy.

Eighth, if you do QE3, you risk losing independence. If you are forced into the position of supporting government bonds, then fiscal dominance comes into play. At that point, you have lost your credibility on inflation. Restoring it will be very hard inasmuch as you'd have to tighten. The flak from the government would be enormous.

Ninth, if war starts with Iran, prices will rise across the board and bonds will fall. You will need ammunition at that time to support bonds.

So, overall, the gains from doing QE3 are uncertain and generally unneeded, such as they may be. QE3 sends all the wrong signals to the markets. It reduces your flexibility by quite a lot. It risks igniting inflation and raising inflation expectations.

My advice is simple. Don't do QE3.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York. He is the author of the free e-book Essays on American Empire.

    http://www.lewrockwell.com

    © 2012 Copyright Michael S. Rozeff - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in