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Spinning Our Wheels with QE3   September 13th, 2012
We're practicing the art of insanity if fiscal and monetary policy       


More observations...

The Federal Reserve announced its long-anticipated next round of quantitative easing, QE3.

The Federal Reserve launched another aggressive stimulus program on Thursday, saying it will buy $40 billion of mortgage debt per month and continue to purchase assets until the outlook for jobs improves substantially.

This is a commitment by the Federal Reserve to an open-ended, unlimited QE3--to the tune of $40 billion per month--until they push the economic string long enough to tighten it.

I'll admit I'm surprised it took them this long to do another round of quantitative easing. I predicted in November 2010 (when QE2 was announced) that we'd see QE3 by late 2011 or early 2012. So I was off by about six months. I figured if they were going to have to do another round of money-printing, they wouldn't do it this close to the election.

I'm sure they held off as long as they could in the hopes of not doing it before the election; the fact they ultimately did it just 54 days before the election rather than waiting until after the election (as they did in 2010) should make it clear just how desperate things are right now.

However, the open-ended nature of this round of money-printing would seem to compensate for the fact that they waited so long. $40 billion/month is $480/billion per year, with no end in sight. And as long as the Federal Reserve continues to roll out more and more money, it's going to become more and more expensive for businesses to operate and hire people.

The Federal Reserve intends to devalue the dollar and destroy jobs until the economy starts producing jobs.


Even more brilliant is their rationale for doing so:

These actions, which together will increase the Committee's holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Long-term rates for 30-year mortgages are already at 3.50%. That's essentially free money. If consumers aren't buying houses, it's not because interest rates are unaffordable. It's because consumers either don't have money due to unemployment, or because they're extremely uncertain about the future. Pushing rates lower will not change either of these factors, and it will not create jobs.

Meanwhile, Obama continues to play chicken on the "fiscal cliff" that's coming at the end of the year. Despite economists and the Federal Reserve pleading for a solution to this approaching fiscal disaster, Obama refuses and Speaker Boehner has stated that he's not sure there will be a legislative solution before we go over the cliff.

With the Federal Reserve flooding the market with money and devaluing our currency while tax rates are scheduled to skyrocket and psuedo-spending cuts in government spending kick in simultaneously, we're currently on course to see what an economy does when fiscal chaos crashes into monetary chaos while politicians watch the train wreck from the sidelines.

It's been said that the definition of insanity is doing the same thing over and over and expecting a different result.

We're witnessing absolute insanity in the fiscal and monetary policy of the United States.

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