Posted 1:02 pm Monday, September 24, 2012
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QE3 has already proven a failure
What a third round of quantitative easing — basically, the Federal Reserve printing money to buy its own bonds — was supposed to accomplish was simple enough: jump-start the economy and keep interest rates low.
By the best measures we have, QE3, as it’s called, failed spectacularly.
“The futility of QE3 was made clear by the financial markets’ reaction to the Fed’s announcement,” analyst Louis Woodhill wrote for Forbes magazine. “The Real Dow, which is the Dow Jones Industrial Average divided by the price of gold, actually fell by 0.65 percent on September 13, the day that QE3 was announced. While the Dow gained 1.6 percent on the day, gold went up by 2.2 percent. In real terms, QE3 made the economic outlook worse, not better.”
Gold is what people buy when they’re nervous. The Fed’s action was supposed to calm the markets. It didn’t. That’s shown in that bump in gold prices. Because that gold bump was figured into the Dow Jones Industrial Average, Woodhill’s “Real Dow” is a better measure of how the market reacted to QE3 and other events.
“The fact that good times are always accompanied by a rising Real Dow is no coincidence,” Woodhill writes. “Prosperity results from rising real capital employed per capita and per worker. The Real Dow is a measure of the relative attractiveness of investing in productive, ‘risk’ assets vs. capital-preserving ‘safe’ assets. Given that the Real Dow has declined by 81 percent since August 2000, it is not surprising that the past 12 years have seen the worst economic performance since the Great Depression.”
But boosting the economy was just one goal of QE3. There was a second one. The Fed’s press release claimed “These actions … should put downward pressure on longer-term interest rates.”
By the best measures we have, QE3, as it’s called, failed spectacularly.
“The futility of QE3 was made clear by the financial markets’ reaction to the Fed’s announcement,” analyst Louis Woodhill wrote for Forbes magazine. “The Real Dow, which is the Dow Jones Industrial Average divided by the price of gold, actually fell by 0.65 percent on September 13, the day that QE3 was announced. While the Dow gained 1.6 percent on the day, gold went up by 2.2 percent. In real terms, QE3 made the economic outlook worse, not better.”
Gold is what people buy when they’re nervous. The Fed’s action was supposed to calm the markets. It didn’t. That’s shown in that bump in gold prices. Because that gold bump was figured into the Dow Jones Industrial Average, Woodhill’s “Real Dow” is a better measure of how the market reacted to QE3 and other events.
“The fact that good times are always accompanied by a rising Real Dow is no coincidence,” Woodhill writes. “Prosperity results from rising real capital employed per capita and per worker. The Real Dow is a measure of the relative attractiveness of investing in productive, ‘risk’ assets vs. capital-preserving ‘safe’ assets. Given that the Real Dow has declined by 81 percent since August 2000, it is not surprising that the past 12 years have seen the worst economic performance since the Great Depression.”
But boosting the economy was just one goal of QE3. There was a second one. The Fed’s press release claimed “These actions … should put downward pressure on longer-term interest rates.”
But they didn’t.
“On Sept. 7, the Friday before QE3 was announced, the market interest rate on 10-year Treasuries was 1.67 percent,” Woodhill reports. “On Sept. 14, the Friday after the QE3 announcement, it stood at 1.88 percent.”
And of course, printing more money means, in the long run, inflation.
“How long will the Fed continue its financial flogging of the American people before it realizes that buying up $40 billion per month of agency mortgage-backed securities is not going to do anything but raise gasoline and food prices?” Woodhill asks.
There’s yet another problem with QE3. As Woodhill noted, the Fed’s plan is to print money go buy those “mortgage-backed securities.” Remember those things?
They caused the economic collapse. Relieving the banks of this burden may benefit the banks, but those banks created the problem by inventing and over-investing in these securities. Why shouldn’t they be on the hook for them?
The argument is that if banks aren’t weighed down with these mortgage-backed securities, they’ll free up more money for small business lending.
That isn’t happening, either. Nor are small businesses beating down the doors of the banks requesting loans. They’re holding back, waiting to see what the economy does. It’s a vicious cycle.
So Woodhill is right: “Give it up, Ben. QE3 is a flop.”
“On Sept. 7, the Friday before QE3 was announced, the market interest rate on 10-year Treasuries was 1.67 percent,” Woodhill reports. “On Sept. 14, the Friday after the QE3 announcement, it stood at 1.88 percent.”
And of course, printing more money means, in the long run, inflation.
“How long will the Fed continue its financial flogging of the American people before it realizes that buying up $40 billion per month of agency mortgage-backed securities is not going to do anything but raise gasoline and food prices?” Woodhill asks.
There’s yet another problem with QE3. As Woodhill noted, the Fed’s plan is to print money go buy those “mortgage-backed securities.” Remember those things?
They caused the economic collapse. Relieving the banks of this burden may benefit the banks, but those banks created the problem by inventing and over-investing in these securities. Why shouldn’t they be on the hook for them?
The argument is that if banks aren’t weighed down with these mortgage-backed securities, they’ll free up more money for small business lending.
That isn’t happening, either. Nor are small businesses beating down the doors of the banks requesting loans. They’re holding back, waiting to see what the economy does. It’s a vicious cycle.
So Woodhill is right: “Give it up, Ben. QE3 is a flop.”
