QE 3 – Will it Do Anything???

by on October 8th, 2014
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Well those of you you who have read my other articles know that I am not a fan of the Federal Reserve Bank. As I pointed out in a previous article “When is Money Laundering Legal? When You Are the Fed!!`…(http://www.associatedcontent.com/article/8314837/when_is_money_laundering_legal_when.html?cat=3), QE 1 and QE 2 were nothing short of a moneylaundering scheme between the Fed and its shareholders…its member banks!!

The end result of these two programs was a temporary boost to stock prices, some commodity inflation and nothing to help Main Street. Why do I say temporary? The Dow as I write this article is back to where it was when the Fed announced QE 2 last October.

If people are counting on the Fed to rescue the economy they have another think coming. The Fed and many economic commentators are holding out hope that the Fed can boost economic growth given the threat that the US may fall into another recession and with that eventuality…unemployment rates would go up even higher.

Despite all the so-called tools that the Fed Chairman says he has at his disposal, the reality is that all it can do it influence the size of the money supply and the shape of the yield curve..particularly at the short end. I say “influence” because the Fed is not the only player in the equation. A lot depends on what the banks to with respect to lending, how much borrowing that consumers and business do and also the actions of other Central Banks.

Curiously, all these comforting words from the Fed Chairman fly in the face of the Fed`s own assessment of its ability to influence economic growth. In July 2008, the New York Fed in an article on its website (http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html) said the following…..

“Following the introduction of NOW accounts nationally in 1981, however, the relationship between M1 growth and measures of economic activity, such as Gross Domestic Product, broke down. Depositors moved funds from savings accounts-which are included in M2 but not in M1-into NOW accounts, which are part of M1. As a result, M1 growth exceeded the Fed’s target range in 1982, even though the economy experienced its worst recession in decades. The Fed de-emphasized M1 as a guide for monetary policy in late 1982, and it stopped announcing growth ranges for M1 in 1987.

By the early 1990s, the relationship between M2 growth and the performance of the economy also had weakened. Interest rates were at the lowest levels in more than three decades, prompting some savers to move funds out of the savings and time deposits that are part of M2 into stock and bond mutual funds, which are not included in any of the money supply measures. Thus, in July 1993, when the economy had been growing for more than two years, Fed Chairman Alan Greenspan remarked in Congressional testimony that “if the historical relationships between M2 and nominal income had remained intact, the behavior of M2 in recent years would have been consistent with an economy in severe contraction.” Chairman Greenspan added, “The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy“

What are the key take-aways from this analysis….

The Fed admits that there is not a strong and at best a weak relationship between what the Fed can do regarding monetary policy and more specifically..the money supply..and the level of economic activity.

Greenspan went so far as to say to Congress that in the early 1990s the economy did the exact OPPOSITE as predicted based on the money supply.

So does it come as any surprise that QE 1 and QE 2 did niothing to help the economy and especially the unemployment rate which has been above 9% for 26 of the last 28 months??

We can all expect that if there is a QE 3 nothing much will come of it. The latest discussion is something called Operation Twist. The idea behind this grand scheme is for the Fed to sell short term Treasury Bills and buy medium to long term bills. This will raise short term interest rates and lower long term term rates…ie flatten the yield curve.

Given that with the concern that the US and global economies might fall into another recession (assuming we got out the first one!!) medium and long term have gone down a lot. The question in my mind is why should the Fed monkey around at the margins to lower them some more..after all the current rates are lower than they have been for at least fifty years!! That in itself should stimulate growth if growth is at all possible.

The bottom line is quite simple…anticpation of Fed action is much ado about nothing!!!

Sooooo..what do you do about all this ?

If the Fed announces anything regarding QE 3..take advantage if there any sort of “relief rally”..it will be short-lived since as I discussed above the end result of anything the Fed will do will be nothing substantive..yeah..short term traders might make a few bucks..but that will be all.

Expectation that Operation Twist is coming has already caused the market to bid up the price of longer term bonds.

Case in point..those of you that read my piece on the Bank of America know that I am 20% stock..40% corporate bonds and 40% cash. Last Friday..the Dow sold off almost 3%. Every single stock that I owned went down in value (big surprise!!)….BUT..all my bonds went up in value. The end result was that my portfolio went UP by a fraction of a per cent..yep..not much..but it was up.

This result illustrates the current market realities.. I’m not claiming any genius here..but just proving how the current market dynamics are working..either you are with the program or you are not…up to you!!

So if the Fed is basically powerless to help grow the economy..what’s left??

Enter stage left..the Obama jobs plan…or Stimulus 2.

Will it work? Probably not.


The stimulus measures are all short term. Just like QE 1 and QE 2 they might help the stock market but the effects will just transitory..AND.. ONLY IF the measures actually get through Congress.

Realistically..if there was an easy $440 billion that could be cut over the next 10 years to pay for this stimulus package..it would already have been on the table during the soap opera we all watched in horror last July on the debt ceiling “debate”.

The fact of the matter is that there isn’t $440 billion that both Parties could agree to quickly to get the package through Congress unless there is a bunch more added to it to satisfy the Tea Party..balanced budget constitutional amendment anyone??

Stay tuned folks..to quote the old expression….the fat lady hasn’t sung yet!!!

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