Quantitative Easing Infinity (QEI)
The Fed professes that QE 3 or as I call it, QE Infinity (QEI) will create jobs but I am not sure how they can expect anybody to buy their rationale. As we know, QE 1 and QE 2 did very little in the way of creating jobs. Might the Fed realize that QE Infinity could actually be counter-productive to economic growth? Absolutely, especially when they know Keynesian economics does not work as a debtor nation as we are; history proves this and Ben Bernanke knows this. However, I do think the Fed felt compelled and somewhat pressured to do QEI since Congress has been unwilling to do anything. Having said that, I don’t think Congress or the Fed actually cares if QEI is counter-productive. Both understand the need for keeping interest rates low for an extended period so we can refinance our National Debt with longer duration paper (bonds). Stop and think about it, if the United States were to recover more rapidly than the Fed wanted, it would force interest rates higher and would derail the refinancing efforts. This itself would create a “fiscal cliff” by higher debt servicing costs. It sounds to me like the Feds actions are one of panic and hysteria to keep rates artificially low. Might the the Fed actually have an unspoken agenda? The reality is, Quantitative Easing is not the answer for jobs or real economic growth as we see by QE 1 and QE 2’s ineffectiveness. Whatever minor benefits you may have seen are artificial and the costs have certainly outweighed the benefits.
Why Mortgage Back Securities?
I question how serious the Fed is about creating jobs. Why did they choose to embark on buying Mortgage Backed Securities in this latest QE Infinity policy which underscores the housing aspect of the economy as opposed to concentrating on making Small Business Loans more available? The answer is quite simple, they have no desire to create jobs. Banks and realtors might love the current Fed policy as they believe it will assist in more home buying but the reality is another quarter point drop in mortgage rates won’t do much of anything since rates are already extremely low.
Small businesses and new start-ups are responsible for about two-thirds of new hiring in the economy. However, past experiences have shown that unless the Fed addresses some persistent problems in lending markets for small businesses, the impact of QE Infinity on small businesses will be virtually nonexistent. Having said that, the Fed could loosen regulatory requirements if they choose to for small businesses but have elected not to. Does this really sound like a Fed interested in creating jobs? I think not.
Now don’t get me wrong, I don’t believe Chairman Ben Bernanke and the FOMC (Federal Open Market Committee) actually want to harm the United States but by continuing to apply Keynesian economics in such a radical way, that’s exactly what they are doing. They know this kind of policy in reality inhibits our National recovery rather then helps it yet nobody ever calls Bernanke out on this at his news conferences.
Personally, it sounds like the Fed is hoping to get house prices up, stocks up and hope the wealth effect will get people to spend more. It sure sounds like a desperation effort for consumerism, not for innovation, not for manufacturing and certainly not for helping small business.
Impact on Stocks
The stock market loves this approach by Bernanke and the FOMC. Basically, what the Fed is doing is creating a stock market rally by a “doctrine” of low interest rates. This only further distances valuations from the projected revenues and earnings that are forecasted for the future; thus creating a dangerous bubble type atmosphere. Stocks need to be valued on something, usually they have a connection to earnings, earnings growth, revenues or revenue growth; and not as a place to flee to escape low yields. What we currently have is money-printing rallies which distort financial reality and will cause negative unintended consequences. In addition, any rationalization for higher multiples are nonsense unless of course you get higher multiples due to stocks declining. Rarely do you get multiple expansion by stocks moving higher when you have a contraction in earnings.
Conclusion:
I firmly believe you have a Fed that is engaging in extremely dangerous policy and creating a bubble in the stock market. When I look at projected earnings for 2013, see where the Chinese market is (down some 65% from it’s highs), see where global growth is headed (down) and take into consideration other factors; I come to the conclusion stocks are overvalued. WouId a 30% drop from peak prices surprise me? Absolutely not. Another key aspect to all of this is, you have a feverish pitch of too many people including the Fed, telling you fundamentals don’t matter anymore; they do. My common sense tells me the division between stocks and the economy are unsustainable (stocks moving higher while the economy chugs along).
Lastly, a thought to ponder, does the Fed always take action for the reasons given or might they have hidden agendas? You decide for yourself. In my opinion, the end result of QEI will be a suppression of economic growth.
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