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Economic Review

11/8/2010

With monetary authorities in the markets in both the US and Japan buying securities to spur economic growth, the results have to be good….or can this hocus pocus strategy backfire in a big way.

Well, QE2 continues in robust fashion as Bernanke and clan announced yet another $600 Billion worth of whatever in the marketplace.  Just to put things in perspective, since the Fed announced it would do whatever it can do to spur the economy back in late August of this year (just about 2 months ago) the Dow Jones has registered about a 14% gain. This QE approach seems to have spread to other fledgling economies as well.  Recently it was reported that Japanese authorities were following suit regarding buying whatever (e.g. REITs) to spur the economy.  Now with incredible gains like 14% in 2 months for US Stocks, most individuals would cheer and declare a victory over economic weakness.  Reality is however that this grand QE2 plan may just set the stage for a huge economic backfire in the medium term.

Ponder this idea.  Instead of increasing confidence for the average US consumer with the excessive and consistent gains posted in US Equities, reality is that fear is beginning to grow and not just for the average Joe out there.  Many well experienced financial and economic pundits are raising the red flag regarding the creation of a bubble in Bonds and Stocks due to policies such as QE. Yes, short term exuberant gains can provide a near term pump to economic activity as individuals spend more due to the increased wealth affect.  However, as was the problem in the past, when markets correct back to realistic levels, what is left is a consumer that spent money on paper gains in the market, only to be left in debt when those paper gains evaporate.

Stop the nonsense with pump and dump strategies.  The US has a structural problem and it’s called outsourcing of jobs.  Bringing jobs home does not end international commerce (for those who cry protectionism).  Nations can still trade goods and services, but domestic economies require employment to remain domestic in order to create and maintain a sustainable economy.

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