Ignoring the vast majority of economists and investment strategists who argued that another round of money printing was unnecessary and dangerous, Federal Reserve Chairman Ben Bernanke has just unleashed a frightening and unlimited round of endless money printing. Calling it quantitative easing (QE) Part 3 is inaccurate because a discrete third part suggests that the money printing has limits. A more apt description of the inflationary monster Bernanke just unleashed is QE Part Infinity – no limits, no caution, no margin of error. To debase the U.S. dollar even further, Bernanke also announced that the Fed’s zero-interest-rate policy (ZIRP) would be extended by at least six months – from late 2014 to mid 2015.
In its September 13th policy statement, Bernanke wrote the following:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. These actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.
U.S. Employment Growth is Very Weak
Unlike central banks in other countries which are focused exclusively on maintaining stable prices, the U.S. Federal Reserve has a dual mandate of (1) stable prices and (2) maximum employment. Bernanke is justifying QE Part Infinity on the need to promote employment. The U.S. unemployment rate has stayed above 8 percent for 43 consecutive months – the longest such period since the Great Depression of the 1930s. Although the unemployment rate in August fell to 8.1% from July’s 8.3%, the drop occurred for all the wrong reasons — 368,000 fewer Americans were looking for work and the labor participation rate fell from 63.7% to 63.5% — its lowest level since September 1981. If labor participation had remained at July levels, the unemployment rate actually would have risen. Furthermore, according to the American Enterprise Institute, if the labor participation rate was at the same level that existed when President Obama first took office in January 2009, the unemployment rate would be an awful 11.2%!
Money Printing Doesn’t Create Jobs!
The question is whether more money printing is an effective way to promote employment. QE1 cost $1.7 trillion and QE2 cost $600 billion for a total of $2.3 trillion. QE Infinity at $40 billion per month will add an additional $480 billion per year or $4.8 trillion over ten years. In his August 31st Jackson Hole speech, Bernanke said that QE1 and QE2 collectively produced 2 million private-sector jobs, which means that each job cost the U.S. taxpayer $1.15 million. First of all, many economists don’t agree with Bernanke’s assertion that money printing has created any jobs, let alone 2 million. According to Catherine Mann, Brandeis University finance professor and former Federal Reserve economist:
We know that QE reduced interest rates, but we also know that has not led to more construction, more mortgages, more business investment, or more lending. Since it hasn’t done any of that, it probably hasn’t created jobs either.
Even if you do believe Bernanke’s QE cause and effect, $1.15 million per job sounds like an incredibly inefficient use of public money, even worse than the $2.6 million spent training Chinese prostitutes to drink more responsibly on the job.
Lower Interest Rates Boost Stock and Commodity Prices But Nothing Else
Home mortgage rates are already near all-time lows and the housing market is recovering nicely. In addition, 10-year U.S. Treasury yields were at near 60-year lows. Lower interest rates are simply not needed! As I wrote in Stock Market Volatility: You Ain’t Seen Nothing Yet, Bernanke is playing a very dangerous game. To repeat a 2010 warning from money manager and economics Ph.D. John Hussman:
Quantitative easing promises to have little effect except to provoke commodity hoarding and an expansion in stock valuations to levels that have rarely been sustained for long. The Fed is not helping the economy – it is encouraging a bubble in risky assets, and an increasingly unstable one at that.
Indeed, bond king Bill Gross recently tweeted that QE Infinity’s primary effect will be to debase the U.S. dollar and inflate the prices of real assets. His advice:
Buy real assets…gold…a house!
Similarly, credit rating agency Egan Jones downgraded the U.S. credit rating from AA to AA- on the news of QE Infinity, concluding that it will actually hurt the U.S. economy by inflating commodity prices and pressuring corporate profit margins:
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 mortgage-backed securities 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.
Fed Chairman Ben Bernanke is a Politician, Not an Economist
If more money printing is unlikely to create jobs, why is Bernanke doing this crazy maneuver, something Texas Governor Rick Perry warned last year would be “almost treasonous?” The answer is that Bernanke isn’t really concerned with putting America back to work but is only interested in saving one job – his own as Fed Chairman. QE Infinity’s short-term effect of boosting stock prices over the next few months will make the American people feel richer and make them less angry about Obama’s failed economic policies – perhaps just content enough to get Obama re-elected.
Obama’s re-election is very important to Bernanke. It shouldn’t be, but it is. Although Bernanke’s term as Fed Chairman ends on January 31, 2014, Republican presidential candidate Mitt Romney has made it clear that Bernanke will be fired if and when Romney becomes president. In contrast, a re-elected President Obama would certainly keep Bernanke on for the remainder of his term and would almost as certainly re-appoint him in January 2014 for another four-year term.
Stable Inflation Expectations, Low Taxes, and a Strong Currency Is What the U.S. Economy Needs, Not QE Part Infinity
Giving the stock market a shot of QE-laced cocaine may help Bernanke and Obama, but it will hurt everyone else through a debasement of the U.S. dollar and cause hyperinflation down the road. Of course, the American public won’t see it that way because everybody seems to have a short-term “immediate gratification” mindset these days. Just like Obamacare creates a weak and dependent Medicaid Nation by destroying the long-term viability of private heath insurance, as well as destroying the entrepreneurial drive for innovative, high-quality health care, so too does a debased currency destroy consumer purchasing power and price stability – the two pillars of confidence needed by businesses to invest and produce.
The real way to create jobs is to keep the U.S. Dollar strong and inflation expectations muted. Low taxes also help. QE Part Infinity does none of these things; in fact, it does the direct opposite. As money manager Michael Pento eloquently puts it:
The truth is that destroying the purchasing power of your currency serves to increase the unemployment rate. That’s because it erodes the impetus to save and invest, robs the middle class of its standard of living and leaves the economy in ruins. Economic growth comes from low and stable interest rates, low inflation, small debt loads and a sound currency. But persistent money printing erodes all of the basic principles of a strong economy.
What you eventually end up with is a crumbling currency, intractable inflation, onerous tax rates, a sovereign debt crisis and a depressionary economy. Not really such a good trade — just to keep a few central bankers off the unemployment lines.
Even if you are a died-in-the-wool Democrat, the politicizing of the Federal Reserve and this conspiracy between Bernanke and Obama to influence the presidential election should make you nauseous. In fact, the more I think about it, the less hungry I get. Perhaps I’ve just found the silver lining to this whole mess: I no longer need to spend money on the Arena Pharmaceuticals (NasdaqGS: ARNA) diet pill.
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Mr. Fink takes every opportunity to kick President Obama, whether it’s warranted or not. I wonder sometimes if he’s on the Republican payroll.
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Another worthless partisan shriek. If a Republican were favored to win, Bernanke would be on Mount Rushmore. It’s because Obama’s ahead that we hear silly buzzwords like “conspiracy.”
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If youwant to be upset with bernanke and obama. I think you should start with our congress. Certainly the republicanshave taken the position that we cannot raise any taxes. It is congress that has voted for all the debt we have. Let them stop giving special perks to their constituants. with loopholes and special benefits to oil companies, etc. When I hear them ask if we are better off today than we were last year I get incensed. Ask them if Congress is better off when they came into office or when they leave office. Citizens go to jail or are prosecuted for inside information yet cogress is exempt from investing on inside information.
You would think that Obama and Bernanke would at least be singing from the same sheet music. On the campaign trail ( which for Obama is an endless treadmill, like a hamster in a wheel, just spining in a circle, going nowhere) Obama touts his success in creating jobs : Under my administration we ( you know he really means I) have created 4 Million new jobs. But Ben, who really wants to take credit for job creation since it falls under the “dual mandate” that he is such a stickler about) claims he has created 2 million jobs. But neither one wants to cite the fact that the workforce participation rate is at its lowest level since 1981. At least both are in agreement that without both of them, things would have been worse. Forget the counterfactualness of that statement. It’s the explanation Democrats use for everything that fails under their policies since it is such an easy explanation to give and covers up the fact that the Democrats rarely have a clue about what their policies will do. Said one of the greatest sycophants of all time, the inimitable Bob Beckel, Democrat strategerist for Jimmah Carter ( and proud of it): Our policies are frequent wrong and ineffectual. What matters is that “we tried” Great epitaph for the failed policies of an entire presidency, WE TRIED. But we failed just as well have always failed. And always will.
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Bernanke’s has just Nailed Responsible Retirees
Low Interest Rates Are Harmful to Retirees
Retirees need to live off the “Interest” on their SAVINGS !!!
If the interest rate is too low, they have to dip into their asset saving base, thereby reducing their savings. i.e., their asset base.
To Quote Seeking Alpha Newsletter:
“Besides the poor, this latest move also declares war on the retirees or those who subsist on fixed income returns from bonds. With the Fed’s monetary policy stuck at zero for another three years at least and more Federal money creating artificial demand for fixed income assets, yields will not rise for quite a while. This means that the coupons on newly issued government and agency bonds will be stuck at below inflation rates.”
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Jim, You indicate that what Bernanke announced last week will likely help Obama’s re-election chances. Question: If the Fed’s announcements were seen as detrimental to Obama’s re-election chances, would you still be against them?
The Tortoise notes the complaint that many retirees are suffering financially because interest rates on bank savings, C.D.s and money market funds are so low and blaming the Fed and Bernanke for this – something that has continued since 2008!
How did all these retirees end-up with their savings in non-productive savings accounts when the equity markets have been rising since March 9, 2009, corporate profits are at record levels, dividends are being increased, many income ETFs are yielding 6%?
Following the advice of Mr. Fink’s publication, we stayed-the-course in 2008/2009 with our diversified investments and have experienced recovery of investment values and increasing dividend income that sustains our modest lifestyle without the necessity to sell any assets.
Jim, me thinks you speak with a “forked tongue”!