“Unlimited QE3” Quick Analysis

Some key components of the Fed’s recently announced QE3 program are: The creation of $40 billion a month out of thin air to purchase mortgage-backed securities at artificially low interest rates; the continuation of Operation Twist; QE without any defined limit; the purchase of additional assets as required; and near-zero interest rates until at least 2015.

Sterilization wasn’t mentioned; in other words, there was no promise to contain the newly created currency. It will go directly into the economy, meaning radically increased inflationary risks.

The Fed is also using QE3 to attack the problem of unemployment. The cover story is that QE3 will increase the money available for lending and to lower interest rates. “It is a credit to Mr. Bernanke that he was able to read this statement with a straight face, for the assertion that the economy is being held down by too high of interest rates and tight money is ludicrous,” writes Amerman.

The US has a structural problem with unemployment that is essentially unsolvable so long as the dollar remains high in value relative to other global currencies. This was exacerbated by the summer’s Eurozone crisis.

Bernanke needs to weaken the US dollar, so he is monetizing in plain sight, and pledging to monetize until the US dollar is driven down to a level where American workers can once again be globally competitive.

If the dollar falls, then US employment is indeed likely to rise—at the cost of falling employment elsewhere. But if the rest of the world is not willing to watch jobs flow to the US, then there is likelihood of counterstrikes, and even the danger of all-out currency warfare.

So the Fed has promised that it will create money out of thin air on a massive scale for as long as it takes until substantial improvements in the labour market occur, and that near-zero short-term interest rates will continue until at least 2015, even as interventions in the long-term bond market will also hold long-term interest rates down.

Conclusion: Inflation goes up (whether officially captured in inflation statistics or not), and interest rates are forced even lower, for a longer period of time. There is a term economists use for this process: financial repression

To read Daniel Amerman article:  “Unlimited QE3” Quick Analysis

Tagged as: dollar, Money, rates, Unemployment