When we look at markets, we tend to suffer from severe myopia. Rather than looking at the bigger picture, we want our fix today so we can enjoy the inflation buzz for a few more months … or maybe days.
Quantitative easing is nothing new. Japan attempted it and it failed for them as well. Of course, the spin is that it really worked for the U.S. But, did it? Interest rates are lower now, without QE. Inflation continues either way. Nothing is cheaper right now. Wages aren’t up. Employment isn’t up. Housing is still stalled (with regional exceptions).
What many forget is that when QE1 was initiated, we had just suffered a major market correction. A major bubble in bad debt popped, leaving banks, and ultimately the taxpayers, holding the bag. The S&P 500 lost 50% and the dollar had rocketed up 10% from the previous year; 20% from summer lows. Unemployment was ratcheting up quickly and money velocity had come grinding to a turtle’s pace. We actually endured a short period of — GASP! — deflation, the archenemy of fiat currency.
While I would never support the idea of QE (it’s a disaster in the long run), the reasons for wanting to stimulate the economy were quite evident. So, the Fed agreed to start buying debt in an effort to get more currency in circulation.
With the announcement on November 25, 2008, came a sluggish response in the S&P coupled with a nice drop in the dollar. But neither of these lasted as the dollar climbed back above pre-QE1 highs and the S&P lost another 10 from previous highs.
Not really having much else to work with in their bag of tricks, the Federal Reserve ramped up the QE (purple line). This time the economy took it in, hook, line and sinker. The dollar dropped, bringing back the Fed-beloved inflationary trend. The velocity of money increased and stocks started moving upward again.
QE2 didn’t face nearly the same challenges as we were facing when QE1 was implemented. Though interest rates had dropped, the velocity of money was still languishing. Therefore, the Fed came back with another effort to move things along. The timing was likely less than ideal, with results not really worth mentioning. Interest rates actually increased a bit and the dollar popped up at first. However, by the end of QE2 in June 2011, the dollar had gone down in value and stocks were doing just fine.
Today we simply don’t have enough going wrong to merit QE3, yet. It’s likely that we can count on it in the not-too-distant future. But too many were expecting it today. They wanted their fix so they could continue to enjoy the ride to whatever pseudo-prosperity such manipulation brings.
Markets are currently overextended. Even precious metals are in overbought territory. Expect a pullback in the near future. Then, when people squeal loud enough, expect the Fed to step in with another round of the QE fix. Markets will recover, for a season. But at what price?
Eventually all this manipulation of the economy will have to be reckoned with. The dollar will die, and take vast amounts of wealth with it. It’s not a matter of if, but when. No fiat currency has ever survived — ever. The dollar will not be the exception. But, when the fiat currencies fail, it’s always the hard assets that thrive.
QE3 might offer a respite from the inevitable. QE4 might as well. But, eventually, the drug will no longer be able to bring relief. Instead, it’ll cause convulsions that’ll send the patient reeling into a coma that’ll take more than any printing press can possibly do to revive it.
J. Keith Johnson’s Austrian and libertarian perspectives on current socioeconomic and geopolitical affairs are fueled by his insatiable desire to both discover and share the truth. A Goldco Direct affiliate, you’ll find his commentary on The Gold Informant website, as well as various Internet financial and news sites.
