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Is QE3 Right Around the Corner?

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Is QE3 Right Around the Corner?
Is QE3 Right Around the Corner?

At the recent Jackson Hole symposium, Ben Bernanke effectively made a play for time. He didn’t announce any new policy measures, but he did leave the door open for more quantitative easing, by stating that the Federal Reserve was ready to take necessary measures to help the economy. Bernanke was probably hoping for more time to wrestle with economic news, since the FOMC’s next two-day meeting isn’t until September 20 and 21, 2011.

With the latest employment figures, though, more analysts, investors, pundits and economists are wondering if another round of quantitative easing could be around the corner. U.S. economic news continues to point to the possibility of a double-dip recession, and the news that no net jobs were created in August 2011 is just another bit of disappointing economic news for Fed monetary policy makers to chew on. So, is QE3 right around the corner?

What is Quantitative Easing?

The point of quantitative easing is to stimulate the economy after more conventional attempts have failed. In the U.S., the Federal Reserve attempts to stimulate the economy by implementing measures that lower the Fed Funds Rate so that banks can lend to each other at lower rates, hopefully spurring them to lend to consumers at lower rates as well, and increasing demand for consumer loans that can fuel consumer spending – which accounts for around 2/3 of our country’s economic activity.

Right now, though, short-term interest rates are quite close to zero. Central banks might try buying short-term government bonds to lower market rates, but when you are this close to zero, it’s hard to lower rate further. This is where quantitative easing comes in. The idea is to purchase longer-term government bonds, as well as purchase financial assets from private sector businesses, including banks. This is done with money that is essentially created out of thin air. Our digital financial system offers the ultimate fiat money, money that is exists because the Fed says it exists. The hope is that the new, electronically created money will increase the money supply, and increase the money moving around in the system, stimulating the economy so that it grows.

Since the financial collapse of 2008, we have seen two rounds of quantitative easing. The latest round of quantitative easing, QE2, lasted from November 2010 to June 2011. According to the Financial Post, QE2 was considered something of a success, and it’s perceived success might be an impetus for the Fed to announce QE3 later this month:

“More importantly, QE2 was successful in ‘propping up’ the equity markets and creating what pundits term as the ‘wealth-effect.’ This means a belief that a strong performing stock market results in greater overall consumer confidence and an increase in spending. Therefore, the current market sell off since May of this year may be enough of a motivating factor for QE3 not unlike what transpired during the sell off preceding the announcement of QE2 in the summer of 2010.”

It will be interesting to see what happens next. According to Forbes, well-known “Dr. Doom” economist Nouriel Roubini feels that QE3 is coming (although he thinks it will be too little, too late) – along with QE4 and QE5.

What Quantitative Easing Could Mean for Savers

One of the points of quantitative easing is to help stimulate the economy – and that usually means some sort of inflation. In order to continue economic growth, many central banks, including the Federal Reserve, pay attention to inflation and attempt to keep it in a certain range. During times of recession, inflation is usually low, so stimulus is meant to help push inflation up a bit. Where quantitative easing can backfire is if the attempts actually push inflation higher than planned for. (Another issue is if the attempt doesn’t work effectively enough to encourage more lending/borrowing.)

For savers, more quantitative easing means more low yields – and no end in sight. And, of course, it means that savers run the risk of not being able to receive yields that beat inflation. This leads to losses in real terms, even if you have cash and other relatively safe investments. (The Forbes article points out, too, that there might come a point when the Fed tries to arrange policy so that Treasury yields are all the way down to 1.5%.)

It is worth noting, too, that even inflation protected Treasury investments might not help you during times like these. There is a debate over the accuracy of CPI as a measure of inflation for “real” people in real world scenarios. Some think that the true cost of inflation on Main Street is much higher than the “official” measures would have us think. Indeed, some argue that there is plenty of inflation going on right now, and that QE3 will only mean an “inflation tax.” Others contend that QE3 could also lead to asset bubbles, further destabilizing markets, and putting the economy at greater risk of instability.

In the long term, though, some argue that QE3 will be of benefit. If quantitative easing efforts ultimately work, the economy should recover, and yields on cash products should rise again, to a point where they will once again be of true benefit to savers. Some recommend that savers look for one year and two year CD rates that are reasonably high now, but provide a way to roll the CDs over into longer term products in a couple years when the economy is on the right track and yields are higher. (Of course, this scenario assumes that economic recovery will come in the next couple of years.) For now, though, and as has been happening since attempts at economic stimulus beginning in 2008, savers are likely to continue to see the short end of the stick. QE3 likely won’t change that.

What do you think of quantitative easing?



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13 Comments.
Comment #1 by scottj posted on
scottj
“More importantly, QE2 was successful in ‘propping up’ the equity markets and creating what pundits term as the ‘wealth-effect.’ This means a belief that a strong performing stock market results in greater overall consumer confidence and an increase in spending. "

The above is such a flawed policy, The point is to make you think because your stock portfolio is is up you can then go ahead and spend more of your savings and/or borrow? Pretty much the same thing as when people saw the value in thier house rise they went out and borrowed and spent more. Was great for awhile but we know what eventualy happened. So now markets get "artificially " proped up and at some will crash and people's portfolio come way down and they  also have less saved and more debt. Want to increase my consumer spending? Then give me higher savings rates. 

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Comment #2 by lou posted on
lou
I agree with scottj, there is no objective evidence to suggest QE2 was successful. Let's look what happened during that period: The unemployment rate remained at very high levels and the economy actually slowed considerably by late spring of 2011.

If the Fed really wanted to improve the economy, they should increase the federal funds rate from the 0-.25% to at least 2%. By allowing people to derive a modicum of interest income from their savings, imagine the billions of dollars of additional interest income that will be generated and can be used for consumer spending. I can't think of one action by the Fed that would have greater impact than increasing the income of millions of Americans, thereby instantaneously enhancing their net worth and, ultimately, improving consumer confidence and enhancing economic activity.

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Comment #3 by williamt posted on
williamt
The article dealing with the supposed success of QE2 is misleading because consumer confidence probably correlates much closer with a LOWER RATE OF EMPLOYMENT rather than perceived "health" of stock markets. Further, individuals whose asset holdings largely consist of equities are more likely to simply plow profits from equities into more equities or other higher-risk types of assets. The bottom line here is that "QE" efforts make little positive contributions to the "real" economy because of their  specialized effects. The public at large has a pretty good picture of what the emperor isn't wearing--i.e., that economic conditions are not much like past recessions but more like ay a major systemic contraction resulting from a number of "TIONs" that have occurred over many years: automaTION,  globalizaTION, and deregulaTION. Until there gets to be some real improvement in putting clothes back on the emperor, fixes suchas the "QEs" will simply provide a thin veneer that will wear off very quickly. 

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Comment #4 by ttolstoy posted on
ttolstoy
Quantitative easing is a code word.  It is money-printing accomplished by "buying" assets for the central bank.  The money, of course, is conjured out of the air, since we are no longer on a gold standard, nor do we follow any standards at all, with respect to the excretion of paper money.

In practice, quantitative easing always supplies money to the primary dealer banks first, who gain most of its benefits.  Then, it trickles down to the rest of the economy.  By debasing the stock of existing money, QE effectively transfers the wealth of persons not closely connected to the central bank to those who are the first to receive the new money.  In other words, the Fed is stealing the value of Grandma's CDs to give to Goldman Sachs and JP Morgan.  That is QE in a nutshell.

As soon as a tepid recovery finally gets underway, and with all this asset theft going on, it is inevitable that some of the wealth will work its way into GDP, we are going to see triple digit inflation for several years, effetively wiping out savers.  Under these circumstances, only fools will buy long term CDs at single digit interest rates.  Better to keep your money in demand deposit accounts, as you wait for big dips in precious metals, which are real money, rather than paper that can and will be printed into infinity, whether we are talking about dollars, Euros, pounds, yen, or any of the other equally questionable currencies now regularly excreted from the bowels of the world's central banks.

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Comment #5 by lou posted on
lou
#4 - would Tolstoy agree that all retired folks should sell all their fixed income assets and invest all their money in precious metals. Even Tolstoy might consider that a bit imprudent.

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Comment #6 by Bozo posted on
Bozo
An argument can be made that swapping out of (or declining to renew) the long end of a CD ladder waiting for Godot is a fool's game. Do the math. Assume a finite five-year horizon. You have a $100K 5-year CD maturing and your options are: (a) re-invest at 2.3% or (b) plunk it short in Alliant's savings account (1.15%). You have no other options (bear with me; I KNOW in the real world you have other options; this is just for illustration). Your "delta" is 115 basis points or $1150/year. At the end of two years, your "delta" is $2300. You have three years left in that finite time horizon. How much would you have to get on a 3-year CD just to "break even"? If you guessed over 3%, you win a prize. Again, don't argue with the hypo ("oh, I wouldn't get a 3-year; I'd buy the 5-year at that point"). We all have finite time horizons (eventually), and I'm simply trying to point out that fiddling with your ladder is just another variant of market-timing where you must make up for lost opportunity now by much better deals in the future. That's tough to do, even for professionals (just ask Bill Gross).

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Comment #7 by ttolstoy posted on
ttolstoy
I absolutely would advise all elderly folks on fixed incomes to get entirely out of debt-based fixed income investments.  They are all going to be wiped out in less than the next 5 years, if they've got their money in bonds and CDs exclusively.  If you've got enough money to create a situation where you can depend on your interest payments to subsidise your lifestlyle, you've got enough money to spend outright for many years.  Invest a big portion on the dips in precious metals (platinum being my favorite at this moment), and keep enough to supplement your income by digging into the principal.  Yes, I know...nobody likes digging into principle, but I've done it for 5 years now.  I've been mostly invested in precious metals, and keep a portion of my fortune in demand deposits.  I draw down the deposit cash when I need money.  On balance, my precious metals have appreciated so much that I can sell small parts of the PM collection to more than cover expenses.  I've earned FAR more than I ever would hae made if I had bought CDs, which I stopped doing 5 years ago, because I foresaw the 2008 collapse. 

To be honest, back in 2006, I believed that most of the big banks would simply collapse, and be liquidated.  I did not imagine, back then, the depth of the corruption in the USA, or that such corrupt connections between the Fed and the big primary dealer banks would cause the Fed to steal from CDs to give to Goldman Sachs.  But, I knew things were going to fall apart, because the Ponzi nature of the US economy was clear even then.  Anyway, as a result of QE and the completely corrupt bailouts for billionaires, our government is forced to induce heavy inflation in order to pay off its unsustainable debt load.  That means the US dollar will eventually utterly collapse, leaving savers wiped out.  I used to be a saver, as I said, but I don't want the value and buying power of my money stolen from me simply because corrupt people have taken over my country.  So, I started to buy true money (gold), and then silver and platinum, and I have not looked back since!

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Comment #8 by ttolstoy posted on
ttolstoy
More accurately, I should say that I started to "convert" my paper dollars to true money (gold), because you don't actually "buy" gold, though that is the way society presents it.  You are really just switching to another currency.  You don't really "buy" currencies.  You convert to them.

Interestingly, recently I learned that very savvy gold owners are "leasing" gold to big international banks, as well as jewelers, and making a better return than they can by putting money into a CD.  But I haven't done it, because I don't like risk, and, it seems to me that gold is getting so difficult to get that there is a big risk of never having it returned.

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Comment #9 by pearlbrown posted on
pearlbrown
@Bozo, you are right on the money (only a tiny pun intended). 

For those who might be interested in seeing the numbers, assuming interest is compounded and paid monthly on both the CD and the savings account:

Bal end of   5 yr CD   Alliant       Delta       
Yr 1         102,324   101,150   1,174
Yr 2         104,703   102,313   2,390
Yr 3         107,137 
Yr 4         109,627
Yr 5         112,175

At the end of year2, you would have to invest 102,313 in a 3-year CD at 3.07% in order to have a matured value of 112,170.

Currently, ElPaso Credit Union offers the best 3-year deal nationwide on a $100K deposit at 2.68%APY.  The best non-credit-union deal available for the same term is 1.92%APY at Industry State Bank.  Even assuming the rates remain unchanged and available over the 5-year horizon, the 5 year CD would continue to be the best bet in this scenario.  

1
Comment #10 by moneysaver posted on
moneysaver
The one suggestion in the original article about investing now in 1 or 2 year CDs and hoping that market rates will rise by the time they mature seems a bit flawed...considering that the Fed/Bernanke has just promised to keep market rates at near zero for the coming two years.... If there's any light at the end of the tunnel, it seems it would be farther out than that... But honestly, who knows...

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Comment #11 by williamt posted on
williamt
Gold as a contra-dollar investment actualy appears highly speculative and not to be recommended.  For something like the past 40 years, the price of gold has moved in a different direction from the dollar something around ONLY 20 PERCENT of the time. What can be gained from looking at the effects of a possible QE3 seems to be that what is probably most likely to result will be another bubbling-up of the stock market, and, in the long run, that isn't really much of a positive effect for the economy. Again, this economy doesn't appear to have gone through a typical recession but to have been experienced the effects of factors more systemic than cyclical.  There's no reason to consider a gold as a gold-bullet-investment-solution to counter quick-fix monetary policies such a a possible QE3, policies which may likely actually do more harm than good in the longer run.

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Comment #12 by shinoby posted on
shinoby
Ken wrote:  "What do you think of quantitative easing?"

QE is a kind of tax.  It is a device to redistribute wealth from those who have, over time, managed their money carefully and prudently, to those who have been careless with their money and/or taken imprudent risk and lost. As such, QE is self-evidently wrong.  It is a form of fraud.  It is theft.

That said, though:

The alternative to QE is not pretty.  It is civil unrest . . riots . . and so forth.  Imprudent people seldom blame themselves for their misfortune.  And there are quite a few such folks out there.

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Comment #13 by Shorebreak posted on
Shorebreak
"Operation Twist" will go into effect. The Fed will be buying long-term bonds to dampen long-term rates. Lock-in a 3% 7-year rate now on a certificate of deposit. It will be better than a 30 year Treasury bond for a long time. We are Japan now.

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