QE3 - To Infinity and Beyond!

The recent news from The Federal Reserve reminds me of a saying by Buzz Lightyear. You remember ol' Buzz, the toy astronaut, in the movie series Toy Story. Every time he lept from a piece of furniture, he would proclaim with great fanfare, "To infinity and beyond!!"

That's more or less what Ben Bernanke said recently and I might add with about the same enthusaism. The Fed will try a new round of quantitative easing to jump start the economy. And Mr. Bernanke implied there is no cut off to this third round. He'll do it as long as it takes to get the desired results. Hence, to infinity and beyond is a good interpretation of his policy.

My friend Kevin Geraci of Zions Bank wrote a well written article recently on this subject. I don't normally quote verbatim news articles but I thought his was deserving. So here goes:

 

Two weeks ago, the Federal Reserve announced its third round of quantitative easing, more commonly called QE3, whereby the Fed essentially prints money and then buys assets with it in order to add liquidity to the financial system and bring down interest rates.

 

The ultimate goal of this monetary policy tool is to spur economic growth and lower the unemployment rate—the same promise we got in QE1 and QE2.   Further, the Fed also announced that it is also changing its interest rate forecast and now sees the Fed funds rate remaining exceptionally low through mid-2015 (previously it was late 2014).

 

The announcement of QE3 is wearisome for many and for many reasons.  While the stimulative policies are temporary and artificial, the laws of macro-economics typically are not.  Asset prices have been artificially manipulated and do not reflect long-term economic reality. So what?

 

Two weeks ago, commodity prices rose again as investors sought to hedge themselves against a falling U.S. dollar.  Quantitative easing serves to dilute the money supply still more, and naturally the value of the money declines.  This may be good news if you are an exporting business, but the falling dollar will cause commodities to rise even higher, exactly what we do not need in a recovering economy as essential commodities like food and fuel get much more expensive.

 

The FOMC, of which Ben Bernanke is Chairman, now employs a staff of about 450, about half of whom are Ph.D. economists.  Perhaps that is the problem - the lack of common sense in the ‘monetary market place’.  Perhaps Bernanke should employ a few middle-class workers on his staff as a ‘reality barometer’ to see first hand what is working and what isn’t!

 

And now the Fed states that instead of purchasing customary Treasury Bonds, it is going to purchase large quantities of Agency Mortgages (Fannie, Freddie and Ginnie), up to $40 billion per month worth, in hopes of stabilizing the housing market and creating more jobs.  As if the Government debt situation isn’t bad enough, the Government will own huge pools of 30-year fixed rate agency mortgages that over time (certainly before they mature) will be at interest rates less than the Government’s own Fed funds rate.  Now that is a good investment!

 

Little has taken place in the economy here, and elsewhere in the world for that matter, as a result of QE 1, 2 and likely 3.  Meanwhile, our national debt now exceeds our Gross Domestic Product for the first time since WWII.  So when our creditors start feeling confident enough in their own economies to start cashing in their T-Bills for higher yielding investments, where does our Government get that money?  Or, when our Social Security Fund, the only Federal Budget item that is funded via dedicated funding sources, wants to cash in its Treasury Bonds to pay for your retirement or disability, can we pay them?

 

Is it time to ask the wise men at the FOMC what they're doing?!