Say Who’s in Charge Here

by Nigel Bolton-Shaw on September 26, 2012

The Washington Post asks, “Is QE3 working?”

Let us take a look at the answer the Washington Post provides.

The Post begins its explanation by explaining the current Fed Chairman selected in 2005 “has made bold, unprecedented moves in an attempt to bolster the U.S. economy.”

The question to answer is what do these moves portend. Bernanke has stated that the intention is to bring joblessness down while controlling inflation.

The Washington Post doesn’t mention it directly but so far Fed “easings” cannot be considered very successful.

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The Post takes us through the various ins and outs of the newest QE stimulus as follows:

Mortgage rates, C+: This is because mortgages have not become less expensive even though the Fed wants to purchase them one way or another. Banks simply are not willing to make drastic cuts for fear of being overwhelmed.

Inflation expectations, A-: According to the Post, bond markets are signaling an expectation of higher inflation and that could be due to the looming QE3. Expectations are for a rate of 2.17 percent. This is seen as positive because people are willing to spend now because inflation will eat away at the value of their dollar tomorrow.

Commodities, B+: According to the Post, those in charge of the money supply fear inflation will spark a jump in commodities. So far this hasn’t taken place. Oil is down and even corn futures are down a bit. Metals are less predictable, which the Post finds worrisome.

The Dollar, B: The article concludes the Fed is doing a decent job of devaluing the dollar relative to other currencies. But there are worries it points out because the EU too is embarking on an easing program that may make the Fed’s less effective.

The stock market, Incomplete: According to the article, the jury is still out on how much stimulation will take place in the stock market and whether the summer rally is a result of QE3.

In commenting on all of the above, we’ll make one broad generalization. Various central banks have dumped perhaps US$75 TRILLION into the markets in the past four years to ease the economic contraction.

The results that the Post provides us in this article have little or nothing to do with what will happen over time as currency finally begins to circulate.

Price inflation, sooner or later, is going to be a big factor and central banks will have to hike interest rates, maybe hard. And once interest rates go up there is no telling when they will stop.

The Post gives us the impression things are under control and moving ahead logically. But with so much money already sitting in bank coffers it is not easy to believe that the “masters of the universe” are entirely in charge anymore.

It’s going to be a wild ride …


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