There is a saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.”
By using that definition, Ben Bernanke is insane! A couple weeks ago, the Federal Reserve Chairman announced the official start of Quantitative Easing: Part Three. The obvious question one should ask is, “If the first two and the Twist program didn’t work, then why would we do more of the same?”
The Fed is engaged in monetary policy which is used to control the free flow of US dollars in the open market. They are currently buying US Treasuries to inject that money into the economy and at the same time, lower interest rates. The theory is that the money will find its way into the hands of consumers and the lower interest rates will encourage business borrowing and expansion.
Another effect of this “printing money” to buy Treasuries is that the increase of US Dollars in circulation should lower the value of the dollar. This makes US produced goods and services cheaper and should increase exports to other countries.
There is a large fault with this theory. Manufacturing is not done inside of the US anymore! According to the CIA Fact Book, the United States GDP’s composition is only 19.2% industry and 79.6% services! So expansion for businesses actually increases employment overseas not in the US. What is needed is a more friendly business environment within the United States. This is fiscal policy and is controlled by Congress, not the Fed.
So what does the latest round of financial stimulus mean as we are in the midst of the two historically worst months for the markets? September and October usually have the worst returns in the equity markets out of any months of the year. We may have a milder fall trading and investing season.
Looking at the previous QE’s, you can see the effect on the equity markets. In fact, the Fed’s programs seem to be the only thing starting the bullish impulses on the equity markets. One has to question how long this can last. Should the government be interfering with free enterprise and manipulating the markets?
There is precedence for government intervention to stimulate economic growth. WW2 and other government program spending in the 1940’s assisted in getting America out of the Great Depression. We also saw a large increase in manufacturing within the US.
Government stimulus needs to be used as the spark, not the fuel to sustain long term expansion. We need that spark to ignite the public’s confidence in spending and that spark should also create new jobs, not reduce the unemployment rate by simply having people become underemployed or drop off from the benefits count.
Ben Bernanke stands ready with hot printing presses to keep the markets moving upwards. This will only serve to mask a larger problem in the economy and will cause the markets to be volatile for years to come. As a trader, I welcome the opportunity that comes with volatility but feel sorry for the millions of investors who do not know what is coming.
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