US Fed's QE3 stimulus may do more harm than good
Andy Xie says the US Fed's latest round of monetary stimulus won't heal the economy, and may well actually worsen the malaise by injecting uncertainty about inflation into the market
QE3 has finally arrived: the US Federal Reserve has promised to buy US$40 billion of mortgage-backed securities a month for as long as it deems necessary to revive the economy. QE3 is QE Infinity! Will it end with a thriving economy or a catastrophe? Remember, it was former Fed chairman Alan Greenspan's "Midas touch" that brought us the dotcom bubble, the property and financial bubble, and the global financial crisis. Will Ben Bernanke's so-called "quantitative easing" take us to a better world?
The mere fact that this is the third round of quantitative easing tells us the limited effectiveness of such a policy. Between February 2008 and August 2010, the US economy lost 8.7 million jobs, though it has gained 3.4 million back. By contrast, between 2004 and 2007, the US economy created an average of about 2 million jobs a year. The Fed bought US$1.6 trillion of assets through the first two rounds of quantitative easing.
Yet, still, the US labour market hasn't performed. Of course, one could always argue that it would have been much worse without the Fed's action. We will never know.
What we do know is that food and oil prices have been rapidly rising despite a weak world economy. Statisticians in the US and China don't see much inflation. Yes, the price of my bowl of beef rice may be the same, but the beef on the rice has been performing a vanishing act. Do the statisticians feel hungry?
Wall Street is grateful for the quantitative easing. Internet stocks are bubbly again. Bond prices are rising, increasing the value of the main asset the big banks hold. Commodity prices go up and down with the coming and going of quantitative easing, creating opportunities for traders to get rich. Wall Street is supposed to allocate resources efficiently. It is doing little of that nowadays. Turning the market into a casino has become the main business. The Fed runs the economy through financial markets; is that helping efficient allocation?
This open-ended quantitative easing is supposed to give business confidence that the Fed is committed to improving the economy. American businesses have historically high levels of cash. If they invest the money, employment will rise, demand will follow, and businesses will make money. The Fed is convinced that the virtuous cycle can be activated if confidence is regained. Will businesses take the bait and invest?