QE3: The Morning After

by: William Larson

Every time I hear the acronym QE (Quantitative Easing), I think of Newton's third law of motion that states: "To every action there is an equal and opposite reaction." QE is, after all, just a more stylish way to refer to the government's act of printing more money, with the equal and opposite reaction being to fuel the engines of inflation.

It never ceases to amaze me that, in this age of worldwide uncertainty, people are often so willing to settle for a "quick fix" for problems that impact their daily lives, even if it means creating the possibility of greater, more severe problems later. QE 1, 2, (and maybe 3, 4, 5) are nothing more than the Fed's own brand of "firewater" that will quench one's thirst for easy money, but will also guarantee a wallop of a hangover the next day.

Previous QE cash injections by the Fed have already increased the U.S. money supply by $2.3 trillion and, frankly, the results have been underwhelming. Since QE1 (2009) and QE2 (2010), unemployment has changed very little, especially when one considers the number of formerly employed people who have just given up trying to find work.

The GDP has hobbled along at 1% to 3% since QE2. Some projections show that this year the national debt will exceed the GDP.

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What About Inflation?

Through their stimulus programs, the Fed has added $1 trillion to the money supply over the past twelve months.

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While the Fed maintains a target of 2% for inflation, attitudes regarding it have softened somewhat. Short term inflation rates that exceed 2% are not considered particularly dangerous so long as they remain short term. But just where in the U.S. are inflation rates 2%? I for one would like to move there.

So far this year, my property tax increased 23%; food costs have rocketed; gasoline prices are outrageous; rents have significantly increased; even clothing costs prices have gone sky high.

It's an economic fact of life that when more money chases the same goods, prices rise. And that's the real reason prices have risen. The more dollars the Fed pumps into the U.S. economy, the more inflation will rob us in the marketplace. For every new dollar printed by the Fed, the value of existing dollars decreases.

Knowing this, why would we want QE3 to take place?

The Bottom Line

QE3 would:

  • Artificially increase stock prices, particularly in the financial sector
  • Further eroded the value of the dollar, thereby reducing purchasing power
  • Guarantee the inevitable increase in inflation

I realize that there are many today who see QE3 as a kind a miracle elixir for the U.S. economy, that is just what the doctor ordered. What concerns me are its side effects, some of which are worse than the illness itself.

If you think that jump starting the U.S. economy has been difficult, history teaches us that nations who have battled runaway inflation have lived through a protracted nightmare. Just ask Germany.

One last thought: In a free nation, markets should be free from external manipulation, and the same welfare mentality that seeks handouts from a federal government too willing to provide them should be abandoned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.