While testifying in front of the Joint Economic Committee in Washington regarding monetary policy and the economic outlook of the U.S. economy, the Chairman of the Federal Reserve, Ben Bernanke, said yesterday, “…the committee has said that it will continue its securities purchase until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “The Economic Outlook,” Board of Governors of the Federal Reserve System, May 22, 2013.) In other words, the Federal Reserve has made it clear, once again: it will not stop quantitative easing until the unemployment rate comes down.
The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.
I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.
First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed yields have collapsed. The yield on 10-year U.S. bonds is less than two percent; meanwhile, tax-favored dividends from the rising Dow Jones Industrial Average stocks pay 2.35%.
It is very well documented in these pages how investors are rushing to get higher yields as the Federal Reserve stays the course. Investors are adding junk bonds to their portfolio; conservative investors, like the central banks, are buying stocks; and bond funds are buying stocks, too. In the housing market, we have institutions buying distressed properties for cash, so they can fix them up and rent them out in hopes of a higher rate of return.
Secondly, the more paper money the Federal Reserve prints and injects into the U.S. economy, the bigger the impact it will have on the buying power of the average American. Inflation, which the Consumer Price Index (CPI) says is not there, is rising.
Last but not least, quantitative easing promised economic growth, but we really haven’t gotten it yet. We still have a significant number of Americans unemployed or working part-time because they are unable to find full-time jobs. But, oh yes, the stock market has risen.
Prolonged quantitative easing has not helped the U.S. economy; rather, it is creating bigger issues that we will eventually need to deal with, like the current stock market bubble. We only need to look at the Japanese economy to see the ineffectiveness of continued quantitative easing—it doesn’t work in the long term. Throwing money at our problems doesn’t solve the problems.
What He Said:
“Anyway you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. This was a dire prediction that came true.