Saturday, July 2, 2011

QE-3 would be a disaster for US Dollar----by Shan Saeed

The Federal Reserve's recent quantitative easing program, a $600 billion bond buyback program designed to stimulate the economy and the latest in a series of similar assets purchases, really didn't help the economy that much. Easing did weaken the dollar somewhat, which was good for U.S. exports. There is no empirical evidence that huge inflow of money into the system basically worked. It obviously had some effect on the exchange rate and the exchange rate was a critical issue in export expansion." Aside from that, I am ill-aware of anything that really worked. Not only QE2 but also QE1.

QE2 is the popular abbreviation for the $600 billion bond buyback program, while QE1, the first round easing, involved the Fed's purchase of mortgage-backed securities and other assets, both of which ended up swelling the Federal Reserve's balance sheet by trillions of dollars. The programs were designed to pump banks full of money so they would facilitate stock-market gains, lending and ultimately job creation.
I would be surprised that if QE-3 gets into the financial system as QE3 would continue the erosion of dollar.

Some current Federal Reserve officials have expressed concern with the size of such asset purchases especially at a time of near-zero interest rates.

Bubbles can form.

An extended zero-interest rate policy is producing new sources of fragility that we need to be aware of. Monetary policy is not a tool that can solve every problem.
In fact, interest rates need to eventually climb. The longer US leaves interest rates at zero, the more asset values will be defined by these low rates and the greater the negative impact will be once the inevitable move up in rates begins.

Some say quantitative easing was a mistake. Buying back assets involves printing money, which weakens the dollar and pumps up inflation rates.

Furthermore, a lot of that fresh money shooting off the Fed's printing presses has gone abroad and disrupted exchange rates, pumped up food and other commodity prices while doing nothing to create jobs back home in the U.S. If we analyze from the point of view that it made recovery stronger and more durable, we would have a lingering bad taste in your mouth.

QE2 was a terrible mistake, and I think it has been counterproductive for economic growth. It has gotten inflation up, and that has squeezed the people most in need of paying off their debts. Living standards has gone down by 50% in the last 25 years of an average american.

Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK

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