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QE-Infinity: Poking Holes in Bernanke's Logic

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Does Fed asset buying genuinely help the labor market? Evidence suggests it doesn't.

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MINYANVILLE ORIGINAL I'll start off by saying: I was dead wrong about "no QE3" this time. With the dollar in crash mode and equities at multi-year highs, I did not expect the Fed to do anything more than continue their "Virtual QE3" talking-points program.

With that bit of crow-eating out of the way, it's time to adjust to the new reality and discuss what the program might mean for the market and the economy; additionally, one simply cannot avoid some discussion on the moral hazard and the politics of it.

Let's start off with what the program entails. Quantitative Easing is government-speak for "printing more money" (although, in today's world, this is less about the physical printing press and more about digital transfers). The Fed has been reduced to printing because their usual go-to monetary tool, which is lowering interest rates, has long been maxed-out and ineffective. Fed fund rates are already effectively negative; thus there's nothing more to be done in that regard.

The Fed has departed somewhat radically even from previous QE programs, as this is the first program with no fixed end-date. Therefore, instead of calling it "QE3," it seems appropriate to name the new program "QE-Infinity" (I would simply use a lemniscate after "QE," but my font doesn't allow it). On Thursday, the Fed committed to buying $40 billion worth of Mortgage Backed Securities (MBS) every month in an ongoing open-ended program, which, for those keeping tabs, equals a total commitment of $85 billion a month when combined with existing programs. This will cease when the Fed "sees substantial improvement in the labor market."

Of course, this immediately begs the question, "What will the Fed view as 'substantial improvement?' What are the qualifiers, and where will it end?"

The answer is a resounding: "Nobody knows." In Bernanke's own words: "We haven't yet come to a set of numbers, but we're guaranteeing that we won't tighten too soon." That statement alone should create some discomfort with American taxpayers, as the unaccountable (to voters) Fed is admittedly setting a far-reaching policy with no qualifiers. But naysayers are glibly refuted, as Bernanke demonstrates in a statement discussed later.

Printing money floods the market with more dollars, which makes dollars worth less (supply and demand: more supply equals lower value), which means that tangible assets priced in dollars -- such as oil and food -- end up costing more. This is euphemistically referred to as "inflation."

One of the arguments against prolonged low interest rates and flooding the money supply is that these actions punish savers in two ways: Artificially low interest rates hit savers' accounts directly; and printing money hits them a second time and forces them into high-risk assets as they try to keep up with inflation.
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No positions in stocks mentioned.
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