Quantitative easing. The irony of such a concept is that to the uninitiated in economics, quantitative easing would be perceived as something good for our system, when in reality it undermines our economy by preventing it to function as a free market. A quantitative easing program is but a more sophisticated way of saying “money printing.”
In the United States, money is printed by the Federal Reserve Bank. In exchange for this newly created money, the “Fed” purchases government bonds and/or other financial assets. This allows interest rates to remain artificially low.
The Fed can also print money in order to pay off existing debt (ie. monetizing government debt) or to finance government projects. In all of the above situations this leads to inefficiencies in the market and only worsens the current situation.
Money printing increases the supply of money, which in turn lowers the value of the currency. This is the catch: since the value of your money is lower, you now have less purchasing power, and the end result is higher prices for practically everything. In other words, money printing is the root cause of inflation. The prices of goods are not technically rising; rather, it is the value of the currency that is falling, and this creates a situation whereby more paper money is needed to buy the very items that could have been bought previously with less paper money.
The news media work in tandem such that it becomes very difficult for the average person to connect the dots: most people truly believe that their governments are spending money rationally and responsibly.
At the time I’m writing this, the national debt of the United States stands at approximately 15 trillion dollars (100% of GDP). It is currently the largest debtor nation ever recorded in the history of the world. Will there be another round of economic stimulus, expanding the national debt even higher? There’s a very good chance. As the stock market typically acts as a forward indicator for the economy, the Dow Jones Industrials Index is currently down one percent (-1%) for the year 2011. The S&P Index is down seven percent (-7%). Market indices are negative for the year and they need fuelling power to stabilize and gain strength in the markets.
If stimulus money can be likened to drugs, then the drugs from QE2 are dying off, as they officially ended in June 2011. New drugs will be needed to fuel the stock market or else risk further decline along with the rest of the economy. At this stage, the markets are like a drug addict, and right now they are feeling low. The markets crave the effects of the drugs; they desire it. If more money is injected into the markets shortly, stocks will most probably stabilize and gain strength again, as the markets will feel a “high”. November and December months are historically well performing months for the stock market, although, this is not apparent in today’s markets, due to the low “drug level” at the moment.
If QE3 does happen, it would most probably happen during the beginning of the first quarter of 2012, when markets are historically weaker.
In order for a drug addict to come out clean, he must stop taking drugs, plain and simple. However, that is usually not the case, given the difficulty of such a task. The addict will need to feel the “pain” of the withdrawal and eventually he will accustom himself to a normal and healthy lifestyle. The economy, just as any another drug addict, needs to feel the “pain”: this means more jobs will be lost and the corrective recession will continue. Companies with failed business models will fail and should be taken over by companies with proven and efficient models. In this situation, sound money is restored and jobs will eventually grow in the private sector.
Every time money is printed by governments, it grows the size of government. This results in a smaller private sector and makes it much more difficult for the private sector to create jobs, and grow the economy. Again, because of how the media portrays the functioning of an economy, most people cannot connect these dots as well, and see stimulus money as the only solution to a better future, and thus, the current negative drifting markets will most likely lead to another quantitative easing package in the not so distant future.