Why QE3 is Just Delaying the Inevitable

Markets were overjoyed by the announcement of a third quantitative easing program that was announced yesterday. Fed Chairman Ben Bernanke revealed plans for an open-ended QE that will purchase $40 billion in MBS every month until the Fed is satisfied with the economy. Nearly every major benchmark hit a post-recession high along with strong performances from big name commodities like gold and oil [for more economic news subscribe to our free newsletter].

Some speculate that Bernanke made the move to win another term at the reigns, as a stronger economy could keep Romney out of office, and Romney has been nothing but vocal about his plans to replace the Chairman. His reasoning was obviously an attempt to boost an economy that has had trouble getting going. But it would seem that Bernanke is simply delaying the inevitable. Yes, the numerous rounds of Federal easing will boost the economy in the short term, but nothing after the first QE had a meaningful impact on the economy, it instead propped up an economy that was not deserving of such a jump (as far as fundamentals are concerned).

Right now, stocks are at the highest they have been since the recession began, but let’s compare a few figures. Pre-recession, GDP growth was at about 3.6% at the end of 2007, while unemployment sat around 4.6%. Now, GDP growth is at 1.7% (revised) with unemployment staying comfortable above 8% (if you need more stats, there’s plenty where that came from). Stocks have surged since the recession, but the fundamentals of our economy have only marginally improved. You could almost say that the only thing QE benefits is the stock market, creating a false sense of security for investors everywhere. My favorite analogy that I have read is that the Fed is trying to build skyscrapers on a sinking foundation; they can keep making taller buildings but that foundation is going to give out at some point [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

Eventually, the Fed will have to pull funding from the market, or will be unable to continue funding these programs and we will be in a world of hurt. Investors will suddenly realize there is nothing to justify stocks being this high and a massive sell-off could very well follow. The Fed’s constant easing is propping up markets and creating investor confidence where there shouldn’t be any. Many analysts feel that the recession being cut short by stimulus was actually a negative as it may now lead to a deeper recession afterwards.

Consider how our debt is now sitting at about $16 trillion, more than our current GDP. Further money printing is only going to further dilute the money supply and make it harder to get out from this enormous hole that we are in. With debt higher than our country’s worth, weak GDP growth, and relatively high unemployment, how can the stock market be justified at its current levels? Quantitative easing. My sincere hope is that the Fed and whoever wins the upcoming Presidential election will find a way out of this spiral without causing too much damage, but others like Peter Schiff are not so sure that it’s possible. What do you all think, is QE a false crutch for markets or does it stimulate real growth? Let us know in the comments below!

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Disclosure: No positions at time of writing.

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18 Responses to “Why QE3 is Just Delaying the Inevitable”

  1. [...] – Why Q3 is just delaying the inevitable. – Markets were overjoyed by the announcement of a third quantitative easing program that was [...]

  2. [...] There was a sense of anxiety concerning whether or not yesterday’s QE rally would hold, or if it was a one time buying spree. Luckily, markets were able to close out the day on a positive note, holding tight to the gains they posted yesterday. Stocks and indexes saw a welcomed rally even today, as the Fed’s most aggressive move in recent memory sparked a vote of confidence across Wall Street. Among the best performers was Apple (AAPL), who release the long-awaited iPhone 5 on Wednesday only to watch share prices close today’s session at an all time high [see also Why QE3 is Just Delaying the Inevitable]. [...]

  3. [...] During the highly anticipated European Central Bank meeting earlier this month, the central bank detailed its most aggressive plan to date to deal with the region’s mounting debt crisis. The newly unveiled bond-buying program entails the central bank purchasing short-maturity government bonds to keep borrowing costs down for Spain, Italy and other indebted countries. The new approach is to be a “fully effective backstop” against market volatility and is promised to be open-ended, but yet conditions have been firmly placed on the program. ECB President Draghi indicated that these struggling countries must themselves ask for help and must accept the related conditions, he states that “It’s in the hand of the government of Spain, and the governments of the euro area.” Whether or not these conditions will hinder the program’s effectiveness or help the currency bloc regain its economic footing will likely not be known until much further down the road [see also Why QE3 Is Just Delaying The Inevitable]. [...]

  4. [...] As the dollar continues to weaken, one asset class in particular will begin to look very attractive, commodities. These hard assets are among the best in the financial world at providing a hedge against inflation as well as a weakening dollar. It is widely agreed that at some point in the near future, all of the money printing combined with our massive debt will lead to hefty inflation, making commodities a great long-term buy right now. Below, we outline several funds to help you take advantage of a flailing greenback [see also Why QE3 is Just Delaying the Inevitable]. [...]

  5. [...] During the highly anticipated European Central Bank meeting earlier this month, the central bank detailed its most aggressive plan to date to deal with the region’s mounting debt crisis. The newly unveiled bond-buying program entails the central bank purchasing short-maturity government bonds to keep borrowing costs down for Spain, Italy and other indebted countries. The new approach is to be a “fully effective backstop” against market volatility and is promised to be open-ended, but yet conditions have been firmly placed on the program. ECB President Draghi indicated that these struggling countries must themselves ask for help and must accept the related conditions, he states that “It’s in the hand of the government of Spain, and the governments of the euro area.” Whether or not these conditions will hinder the program’s effectiveness or help the currency bloc regain its economic footing will likely not be known until much further down the road [see also Why QE3 Is Just Delaying The Inevitable]. [...]

  6. [...] the Fed should have let the economy fail back in 2008 and all of the QE programs have just been delaying the inevitable. He feels that Bernanke’s bold policy will actually inhibit growth and job creation. He has [...]

  7. [...] now gone even further on the European facet of his perfect storm, stating that the nation bloc is destined to fail. As many economists feel, Roubini is on board with the idea that easing programs do nothing more [...]

  8. [...] the Fed should have let the economy fail back in 2008 and all of the QE programs have just been delaying the inevitable. He feels that Bernanke’s bold policy will actually inhibit growth and job creation. He has [...]

  9. [...] This may provide some relief to right-wing voters, but not everyone is so sure that this will fix the problem. Marc Faber, also known as “Dr. Doom”, feels that the next Fed Chairman will be no different [...]

  10. [...] QE is simply propping up the economy and when the asset purchasing is stopped, the economy will suffer a major blow. Though Bernanke has been quiet since the announcement of the open-ended easing, he has since [...]

  11. [...] This may provide some relief to right-wing voters, but not everyone is so sure that this will fix the problem. Marc Faber, also known as “Dr. Doom”, feels that the next Fed Chairman will be no different [...]

  12. [...] a sustainable rally that allows the globe to move past the financial crisis once and for all. Thisincreased money supply could lead to inflation if and once economic growth perks [...]

  13. [...] year for investors and traders focused on the metals. While ongoing economic uncertainty and recent additional monetary stimulus from the Fed has kept gold in the news, silver has quietly had a strong run as well. Amidst that [...]

  14. [...] for investors and traders focused on the metals. While ongoing economic uncertainty and recent additional monetary stimulus from the Fed has kept gold in the news, silver has quietly had a strong run as well. Amidst that [...]

  15. [...] back and forth and a number of major events had these metals all over the board. This year saw the announcement of QE3, QE4 and the re-election of president Barack Obama; all of which had big implications for precious [...]

  16. [...] back and forth and a number of major events had these metals all over the board. This year saw the announcement of QE3, QE4 and the re-election of president Barack Obama; all of which had big implications for precious [...]

  17. [...] on these hard assets. Many even argue that the current U.S. recovery is largely aided by the Fed’s monetary policy, and once that disappears the economy could be in for a world of hurt. An unpredictable economy [...]

  18. [...] much of its lost momentum. Due in part to the anticipation of and reaction to Ben Bernanke”s QE3 announcement, GDX is currently trading right around $53 per jameshallison casino share for YTD growth of 2.0%. [...]

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