Friday, September 14, 2012

QE3 Will Harm Not Help

Egan Jones credit rating agency has cut the US credit rating another notch from AA to AA- due the fact that the electronic money printing by the US Federal Reserve will hurt the US dollar and do nothing to help the economy.

Also, right away oil prices shot up to over $100 on WTI and $117 for Brent crude oil. Gasoline prices are not far behind. Get ready for record prices at the pump.

Interestingly government bond prices nearly collapsed with interest rates on the 10 year rising sharply to nearly 1.9% and 30 year bond yielding 3.1%.  Mortgage rates track the 10 year bond, so with the Fed buying mortgage backed securities, the cost of mortgages is going up not down!  Surely the Federal Reserve will succeed in driving down Mortgage Rates with the market intervention.    US ten year bond interest rates, just a few days ago, were near 140 year lows.   How much lower does the Fed want them?  At 200 year lows??

Oh, and stock prices are shooting up too. This, of course, helps the wealthier Americans more than anyone else.  Meanwhile, zero interest rates continue to hurt the mom's and pop's all over the country trying to get 2 or 3% interest on CDs for their retirement (and can't).  Pension funds are hurt by zero interest rates too because bond yields are being suppressed.

American citizens are instantly poorer than the rest of the world as the US dollar declines again.  The Federal Reserve continues to set-up longer term inflation and probably stagnation.  The Fed is trying to create more inflation which is scary when inflation is at 2.5% or 3% already.

Also, the Fed wants a new bubble---any bubble will do!... to prop-up the weak economy.   Since they are buying mortgage backed securities, my guess is that they want to re-ignite a housing bubble.   Isn't that great?   It might succeed for awhile as you borrow demand from the future, but then there will be another post-bubble decline in demand.  Maybe they think that re-ignition of housing might be a "kick-start" for the economy.   It might work I must admit.

The US Federal Reserve is under the leadership of PhD's who are conducting a radical experiment of swelling the Fed's balance sheet;  enabling the dysfunctional Congress, hurting savers, hurting the US Dollar, suppressing market interest rates and perverting market forces.  Bernanke has "intimated" that they really don't know what they are doing and they basically don't know why QE2 didn't work!  QE2 hurt more than helped---so we want more of the same??

All of this bond buying will eventually have to be reversed.  The biggest problem is unraveling the bond buying when inflation pops up.   When the Fed must sell the $3,000 or $4,000 BILLION in bonds to "mop-up" massive excess reserves in the banking system (to control inflation or even hyperinflation), the Fed selling requires that the market will have to buy huge quantities of securities ON TOP OF huge routine government bond sales to finance ongoing deficit spending.  To say that bond prices will collapse and interest rates rise is an understatement.   AND, it will happen at the worst possible time.  The excess reserves appear to be dry tinder accumulated in our economic forest.

Romney has already said that he will replace Ben Bernanke.  I think it's time.

No comments: