Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

QE3: Creates Inflation, Erodes the Dollar, Doesn’t Help Joe America

Monday, September 17th, 2012
By for Profit Confidential

If you were thinking that inflation is not an issue facing the U.S. economy, please think again.

Another round of quantitative easing (QE3) announced by the Federal Reserve this past Thursday will not only further destroy the dollar; it will also create inflation in the U.S. economy. As the U.S. dollar declines in value against other world currencies, goods imported into the U.S. become more expensive.

According to the Producer Price Index (PPI), wholesale prices saw inflation of 1.7% in August. It is the biggest rise in inflation in more than three years. (Source: Bureau of Labor Statistics, September 12, 2012). The inflation in wholesale prices in the U.S. economy in August was mainly due to a hike in energy prices—6.4%, the biggest monthly increase in three years.

The Federal Reserve tells us it is not worried about inflation and its Consumer Price Index (CPI) expectations are much lower for the next few years for the U.S. economy. Federal Reserves believe that inflation will stay at two percent or below until 2012. (Source: Federal Reserve, September 13, 2012).

Let’s get real. We want inflation. That’s the whole purpose of QE3—to create inflation so asset prices go back up. But it is backfiring. Yes, the stock market is rising. Yes, the prices of goods are rising. But the most important inflation goal—creating jobs and increasing wages—eludes the average American.

For years, economists like me have complained that the official CPI isn’t an effective measure of inflation. And the way inflation is introduced to consumers is often tricky. For example, the price of my favorite juice stays the same, but the size of the container decreases. I receive less for an equal price.

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I believe all of this money printing will eventually result in higher inflation and will hit the U.S. economy like never before. Food and gas prices are already on the rise in the U.S. economy. The average American will pay more for basic needs. Unfortunately, personal incomes are not rising in conjunction with higher prices for goods and services. To deal with inflation and higher prices, people will need more money to buy essential goods, but with the U.S. economy in a dire state, more income is not going to happen.

From 2010 to 2011, the median household income in the U.S. economy fell 1.5% to $50,054 and the country’s poverty rate was 15%— that’s 46.2 million people under the poverty line—a number that has increased for three years. (Source: Census Bureau, September 12, 2012.) Almost one in seven Americans is living in poverty!

Now, imagine if inflation were to rise even more. What will happen to the middle class? The middle class will be hurt and they will consume less—not good news.

We already have an increasing number of people going on food stamps, because they can’t survive without them. Inflation will simply be another blow to their pockets. The past quantitative easing programs of the Federal Reserve have not had any meaningful impact on “Joe America.” QE3 will be no different.

Where the Market Stands; Where it’s Headed:

As has been widely forecast in these pages, the announcement of QE3 was to deal a blow to stock prices to the upside, and that’s exactly what happened. But I believe the rally will be short-lived.

Trillions of new dollars created and both the S&P 500 and the Dow Jones Industrial Average are below their October 2007 highs. We need to see if those highs are broken. If they are not, what I have been saying all along about us simply being in a sucker’s rally since March of 2009 will come to fruition.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in Profit Confidential, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles