QE3 Sugar High

With less than two months to go until the Presidential Elections, in rides Ben Bernanke on top of a white horse named QE3, to help boost President Obama’s election chances by injecting a little cocaine into the national bloodstream. The FED

WASHINGTON - MAY 16:  Federal Reserve Chairman...

WASHINGTON – MAY 16: Federal Reserve Chairman Ben Bernanke speaks during the conference ‘New Building Blocks for Jobs and Economic Growth’ May 16, 2011 at Georgetown University in Washington, DC. Bernanke spoke on the government’s role on promoting and research and development. (Image credit: Getty Images via @daylife)

announced today their latest program of quantitative easing, QE3.  However instead of Treasury bonds, this program will buy mortgage backed securities to attempt to further push down mortgage interest rates.

Unlike the other quantitative easing programs, this one is open ended.  The FED will buy 40 billion dollars in mortgage backed securities a month until “conditions improve”; or at least until January of 2014, when the FED chairman’s appointment ends.  This may be Bernanke’s attempt to keep his job, since Governor Romney has already stated that if elected President, he won’t re-appoint Bernanke.  President Obama hasn’t made promises (publically) either way, but if Bernanke can boost up the economy just long enough to drag Obama across the finish line for reelection, it’s a sure bet he will be staying on.

But this sounds suspiciously like how we ignited the financial crisis in the first place.  Even NPR looks upon this round of quantitative easing as a gimmick, as it amusingly collected some of the more common quantitative easing analogies.  I prefer the tried and true sugar high myself.  Injecting cash into the economy is a bit like some candy and soda (non diet of course).  That gives you the sugar high of high stock prices and an upward wobble in GDP growth, but then of course since there is no real economic growth to match, the market declines again, growth tapers back off, and the sugar crash occurs.

Long term however, like human cells subjected to constant rushes of glucose, the economy develops an insulin resistance, requiring greater and greater amounts of sugar to stir any growth.  My analogy breaks down right about here as our economy finally gets diabetes.  That’s when all of the excess cash in the economy causes inflation, which paradoxically pushes interest rates up; the opposite of what the FED is trying to accomplish.

Of course, since our economic recovery has remained rather sluggish, inflation hasn’t had much chance to rear its ugly head, although as I had written last year, what inflation there is has been kept fairly well hidden by the current government reporting methodology.  Now I know there are inflation doubters, who don’t see any connection between the supply of a currency and it’s value, but I did notice this little tidbit in a Bloomberg story:

U.S. stocks rallied, sending benchmark indexes to the highest levels since 2007, silver and gold surged while the dollar weakened as the Federal Reserve said it will buy mortgage securities to bolster the economy. The Standard & Poor’s 500 Index climbed 1.6 percent to 1,459.99 at 4 p.m. in New York and rates on mortgage bonds tumbled to record lows. Ten-year Treasury yields slipped three basis points to 1.73 percent after rising as much as seven points earlier. Oil climbed 1.3 percent to $98.31 a barrel, a four-month high, while gold jumped to the highest price since February. The Dollar Index (DXY), a gauge of the currency against six peers, fell 0.6 percent to the lowest level since May.

Just saying…

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