The Federal Reserve pulling the trigger and buying up $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market, and by doing so they have enacted the third leg of quantitative easing (QE3). This will mean the Fed will have created over $3 trillion our of thin air since 2008!
This move by Ben Bernanke will not help the economy one bit, but will devalue the dollar further.
Federal Reserve Chairman Ben S. Bernanke points to the current rate of unemployment as the reason for the necessity of the stimulus. He said, “We’ve seen not enough jobs growth to bring down the unemployment rate, and what we need to see is more progress.”
So, in other words, unemployment continues above eight percent and that is a “grave concern” according to Mr. Bernanke. Therefore, we crank up the printing presses and dump billions of new dollars into the system as “stimulus,” but what is really happening is the value of the dollars we now hold just lost buying power. However, Bernanke would have us believe that this “stimulus” will somehow bring about “progress” and presumably “employment.” This has to be some of the worst reasoning I’ve ever heard. This is the result of Keynesian economics.
“We’re just trying to get the economy moving in the right direction, so we don’t stagnate at high levels of unemployment,” Bernanke said Thursday.
So getting the economy going in the right direction requires devaluing American currency?
The Fed said Thursday it would buy $40 billion a month in mortgage-backed securities until the outlook for the labor market improves substantially.
Bernanke said the program “should increase downward pressure on interest rates,” particularly mortgage rates, which would encourage more home sales and refinancing.
He would not give a specific level of unemployment the Fed was aiming for, but said the goal was not to continue the purchases until the labor market was at a full employment rate of about 6%. The unemployment rate in August was 8.1%.
“There’s not a specific number we have in mind, but what we’ve seen in the last six months isn’t it,” he said. “We’re looking for something that involves unemployment coming down in a sustained way.”
In a statement on Friday, ratings agency Egan-Jones said,
… the FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities).
The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power.
Hence, in our opinion QE3 will be detrimental to credit quality for the US.
From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.
We are therefore downgrading the US country rating from “AA” to “AA-”.
The downgrade and stimulus are not good signs for stocks either. Traders on Wall Street are skeptical of the Fed’s move and are saying so. Alan Valdes, director of floor operations at DME Securities said, “I don’t think this is going to have a very happy ending because as we’ve seen through QE1 and QE2, it’s not going to create jobs.
To a lot of traders, this is a sign that the economy’s a lot weaker than you think and we’re still on life support.”
Texas Congressman Ron Paul warned against the Fed’s actions this week, stating “I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time.”
Some believe Barack Obama is behind the stimulus in order to help him limp into November and possibly be re-elected. That remains to be seen, but Jim Pethokoukis and Ed Rendell spoke to the subject on CNBC. Watch the segment below: