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Still Expecting QE3   March 17th, 2011
Despite Fed Reserve report suggesting otherwise, QE3 is still coming       

 
QUICK OBSERVATIONS

More observations...
 

Though the Federal Reserve FOMC issued a statement that has people believing there won't be a QE3 or continued asset purchases beyond June, I continue to believe that there still is a QE3 in our future.

Federal Reserve officials signaled they're unlikely to expand a $600-billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane...

'Certainly, this is the most optimistic Fed officials have sounded since asset purchases began in November and, at a minimum, that's consistent with the expectation there will be no third round of purchases,' said Jim O'Sullivan, chief economist at MF Global Inc. in New York.


China is selling more U.S. bonds than it is buying and there's a possibility it might instead start investing in Japan to help its recovery, score some political points, and diversify away from U.S. Debt. Japan's need for cash to fund the clean-up and rebuilding may drive it to cash out of U.S. bonds and bring the money back home. And the dollar has dropped in value against the Euro, once again reading $1.40 dollars per Euro.

All of these things are potentially conspiring simultaneously to decrease demand for U.S. debt. Meanwhile, we had a record $223 billion one-month deficit in February 2011 with trillion-dollar annual deficits for years to come. And not only do we have a projected $1.5 trillion deficit that we have to borrow this year, we have trillions more that we need to refinance over the next couple of years.

With Japan possibly selling its U.S. bond holdings, China already doing so and wanting to diversify, and with the value of the dollar falling which makes all dollar-based investments less attractive to foreign investors, who's going to be buying over $2 trillion in U.S. debt every year to fund the government?

It seems pretty clear that a future QE3 is even more likely than it was when I wrote about it back in November of last year.

Meanwhile, the Federal Reserve is claiming inflation will be tame and the "recovery" is gaining ground so it expects to wind down QE2 as planned. This while unemployment remains about as bad as it's been for over a year, oil continues to spike, the price of gas cruises towards $4/gallon, food prices are up the most they've been in 36 years, clothing prices are up, housing prices continue to fall, housing starts are at all-time lows ... And the Federal Reserve is optimistic about the economy?

Of course they were saying generally positive things about the economy in December 2009 as well, before announcing QE2 eleven months later.

All of this leads me to conclude that the Fed's report is mostly just spin trying to sell the idea of a recovery in the hope that someone actually believes it, starts spending money and hiring people, and the recovery becomes real. Because it's certainly not real now.

And if we've reached the point where trillion-dollar "stimulus" packages spent by Congress aren't working, and trillions of dollars of printed money from the Federal Reserve aren't working, and now the recovery is dependent on the Federal Reserve trying to convince everyone that the recovery is self-sustaining... we're in trouble.

I think QE3 is still coming. The question is just "when" and "how much."

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