Quantitative Easing (QE) is the printing of money and the addition of liquidity into the markets so asset prices like the stock market are given an artificial boost. The Federal Reserve Chief Ben Bernanke believes that by boosting up the stock prices, the masses will feel richer and spend more on consumer goods, thus lifting up the economy. This is based on Karl Marx’s reflexivity theory in which by turning the small wheel (stocks), you can turn the big wheel (economy), which in turn will come back and turn up the small wheel (stocks). Bernanke believe to such a theory, and he wants QE to lift up the small wheel (stocks), which he hopes will lift up the big wheel (the economy).
But after two successive rounds of QE (QE1 in 2009 and QE2 in 2010), it has become crystal clear that quantitative easing doesn’t work nearly as well as theory says it should. In the short term, QE can pull up stocks and the economy, but in the long term, the economy is going to where it’s going to go, regardless of how much liquidity the Federal Reserve is pumping into the economy and stocks. Everyone has now recognized that the economy is slowing down (including the congress), and everyone knows that the federal reserve has only one bullet left which is QE3.
Quantitative Easing is like a medical drug – take it once, and you’ll heal very quickly. But every time the disease comes back, you’ll need to take bigger and bigger doses of that drug, and each time you take that drug, the drug becomes less and less effective until eventually, the drug is useless. QE3 is the last round of QE because everyone knows that QE4,5,6 will be pointless.
With the Federal Reserve recently giving a strong hint that QE3 will most likely to happen, the stocks and commodities are waiting for the call to happen. Everyone now is looking towards Bernanke. Congress has already said that the economy is slowing down and the Fed is the only game in town. If Bernanke doesn’t initiate QE3 now, it’ll seem like he’s behind the curve which is bad for him.
Why Will Bernanke Initiate QE3 ?
Bernanke must prop up stocks from now until election. In addition,every one knows that the economy is already slowing down, so Bernanke will look bad if he’s too slow in reacting.
Bernanke must initiate it soon before the September 12 – 13 meeting. As the market usually takes 2-3 months to react to QE.
Why Bernanke Will Not Initiate QE3?
Everyone knows that this is Bernanke’s last bullet, so once he shoot all the last bullet, all the short sellers might sell on news. So instead of propping stocks up QE3 might just cause stocks to tank. Bernanke knows this too, which is why he is hesitated about initiating QE3.
Bernanke is afraid that QE might cause commodity prices to rise (which has happened in the past) , which is bad for the economy because the cost of everything goes up. Already going up, oil prices will rise even more should QE3 be initiated.
And, there is no doubt that the stock market loves QE, based on the previous QE programs did have some desired effects.
Whether Bernanke will initiate QE3, and if he does, what the market’s reaction will be even more uncertain. That is why we can see since earlier this year that majority of the blue chip stocks, index linked stocks, and elections related stocks are not doing well/doing so badly. Investors are still retaining their interest towards Defensive Stocks that produces steady growth in prices and dividends payout. Traders and speculators have been bullish on small caps stocks and penny stocks from all around the world. Precious metal investors can be seen continuing loading up their assets in metals as the growing fear continues. Whatever we can hear and read, just remember to always do your homework in your own portfolio.