QE 3 Will Be Bad, QE 4 Would Be Devastating

by: Adam Alvarez

In late 2008, the word "stimulus" dominated headlines and became a hot-button issue amongst both citizens and companies alike. To this day, we still find ourselves asking the same questions we asked as the government opened its wallet and raised its debt ceiling in response to the deemed necessary rescue package.

Did it work? What would be the initial response? What are the future consequences?

The final question is the one we may just be beginning to answer. As the Federal Reserve recently assured investors of another round of quantitative easing, the move has generated gains and cheers from Wall Street. However, it's the packages effect on Main Street that should draw the most attention from traders.

Initially, QE 3 was considered a last resort. Something the Federal Reserve would turn to only when absolutely necessary. Markets struggled mightily in May as the anxiety grew. The economy had functioned for so long with the added assistance it became unclear how it could respond without such a helping hand. The Fed didn't want to find out. So it chose to take the easy route. It chose to merely elongate the growing problem.

Now we are beginning to see the end result. The U.S. dollar has retraced 4% as more money is printed. All the while Main Street suffers further as the added easing fails to reach its pockets. Basic economics tells us that won't change.

"QE helps rich people whose asset prices go up and whose net worth then increases but it doesn't flow to the man on the street who is faced with higher costs of living with price rises. You just have a small economy that is booming but the majority of the economy is damaged by QE," said Marc Faber following the announcement of QE 3.

That higher cost of living is arguably the most damaging and noticeable consequence of easing. Grocery stores have become infiltrated with rising prices as consumer's paychecks remain steady. A day-to-day and visual proof that Faber's assertion that such easing hurts the middle class is undoubtedly true.

This leaves investors to wonder how much more markets and the economy can rise when the Federal Reserve is undergoing measures that actually damage the backbone of the nation's economy. Although stocks soared on news more easing was on the way, the long-term effects are sure to come.

These effects are shaping up to focus around either market weakness when easing is finally taken away or seismic inflation and unemployment should such measures be continued. Either way, when QE3 concludes, investors should be prepared for immense volatility. One can only hope such volatility is caused by the Fed's withdrawal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.