To QE3 or not to QE3? That is the question the Federal Reserve Board has been pondering for months … or at least Fed observers think it’s being pondered.
But, as we’ve said before, if the first two rounds of quantitative easing did little to boost the economy, why would a third round help? In fact, each successive round of Fed action has had less of an impact than the one before it.
Quantitative easing is the printing of money by the government to buy bonds, which is supposed to stimulate consumer spending. It hasn’t worked, because consumers are still broke and many have maxed out their credit cards.
The Fed also tried Operation Twist, which involved selling short-term bonds and using the funds to buy longer-term bonds, also had little impact. Operation Twist, which might have been called QE 2½, was supposed to lower long-term interest rates to stimulate borrowing and investment, but it also has had little impact.
As Frank Barbera of Sierra Investment Management put it in his white paper, “Reflections on Slowing Global Growth,” “most of the liquidity created by QE1 and 2 did not find its way into the real economy, but instead ended up right back on the books of banks as excess reserves, with banks actually contracting their loan portfolios.”
Helping banks build excess reserves was, of course, not the goal of QE 1 and 2.
The one positive aspect of quantitative easing is that each round gives the stock market a temporary boost, but the impact is like that of chocolate, which creates a temporary boost, but makes the consumer more lethargic afterward.
Ray Dalio of Bridgewater Securities expressed concern that “there are no more tools in the tool kit of fiscal and monetary policy to help kick the can down the road.”
The problem with kicking the can down the road is that, at some point, the road ends.