QE3 Is Here!

"All the perplexities, confusions and distresses in America arise not from defects in the constitution or confederation, not from want of honor or virtue, as much as from downright ignorance of the nature of coin, credit and circulation." - John Adams

"The great free nations of the world must take control of our monetary problems if these problems are not to take control of us." - John F. Kennedy
So it is finally here!  Yesterday after months of jawboning the Federal Reserve announced that it would buy $40 Billion of mortgage backed securities.  This is in addition to the $40 billion it is currently reinvesting through its "Operation Twist" program.  So the great balance sheet expansion continues.  The main reason sited for this was the fact that after years of trying, job creation is still languishing so the thought is that printing more money (after printing umpteen trillions already) will start to help the economy grow.

The move was applauded by Wall Street as they have been the direct beneficiaries of all this money printing.  The market rallied over 200 points and the market closed above its 52 week high and within striking distance of its all time high.  The new bond buying program is open-ended, which essentially means the Fed will have carte blanche in terms of how much monetary stimulus it feels is necessary to kick start the economy.  With today's announcement, the Fed finally acknowledged the reality that the unemployment rate will be very slow to come down and will likely not reach 7% until 2014 (this is their estimate and once again it is probably too rosy). In fact, the Fed said that without further stimulation economic growth may not be strong enough for sustained improvement in labor market conditions. Translation: the money printing is necessary to stave off the likelihood of another recession.

Wall Street is of the opinion that at some point in time the increase in asset values being manipulated by the Fed will result magically in lowering unemployment.  I take a quote from Peter Worden to reflect his and other stock traders opinion of the move (I have highlighted the more important pieces to bring them to your attention): "Ben Bernanke feels and logically so, that if the value of personal assets such as homes and stocks continue to show improvement, individual consumers will soon feel confident enough to step-up their spending. And thereby add the quintessential missing ingredient to this recovery."

So by piling more debt onto an already debt burden country the individual consumer will feel confident enough to spend money!  Who are we talking about here, the few thousand on Wall Street or the millions unemployed that have no money to spend either way?!  What a bunch of buffoons!  All the debt spending has not worked to date other than making oil and gasoline prices spiral higher and making stock prices reach for the stars.  Somehow another trillion will magically change everything and we will all have money ready to spend on useless junk to stimulate the economy.  To what end exactly?  So that we can then spend the next few decades of our life paying huge tax bills in order to pay off this massive debt burden.

But wait inflation to the rescue.  It will magically morph the debt into something manageable so that it will not be a problem.  But what if inflation remains muted for an extended period and heaven forbid that deflation occurs as that truly would be the death knell.  So what we now have is more debt and policies that are not producing jobs but if we continue to increase the debt level and remain wedded to the same policies we will somehow come out of this just fine.  Unbelievable!

Even the Fed agreed that we are slipping into a recession.  I believe that more money printing is not going to help us out of that in fact I believe that the drag of more debt will result in more and more regular recessions and slower and slower growth.  So if we are headed for a recession why is the stock market almost at its all time high?  Because the money being printed has to go somewhere and for now it is being pumped into the market as there really is nowhere else to go to earn a return on your investments.  This is a complete set up and will not end well and the more they kick this battered old can down the road the bigger problem they are creating.