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7/18/2011

Has the QE stimulus initiative resulted in utter failure…pretty much so.

Ben Bernanke has reiterated many times over the past weeks that the Fed will not pursue QE3.  The reasons range from some clueless bulls asserting that the US economy is in rebound mode and doesn’t require further stimulus and the more accurate pundits have sided with the notion that the QE initiative is simply not working.  We resounding side with the latter and here’s why.

QE was initiated to help drive longer term interest rates lower with the hope of stimulating lending and prop up the beleaguered real estate market.  Those were attractive goals, but let’s do a check on what actually transpired.  Yields on 10 year treasuries are almost exactly the same level they were about a year ago when QE2 was initiated and this takes into account the recent noteworthy drop in yields over the past couple of months in expectations of impending economic weakness.  In other words, the average level of 10 year yields actually rose during QE2.   On the real estate front, the median price of homes over the last year (QE2 time frame) have dropped in the area of 5% . 

If that’s not enough of a failure to stimulate the economy…the pumping of trillions of $s into the system has now begun to show up in increased inflation.  CPI for 2011 is running at an annual rate of 3.6%, and that is with short term rates near zero percent…hence a hefty negative real interest rate scenario.  But wait…perhaps the stimulus initiative helped the economy in other ways…like reducing unemployment in a significant way.  Wrong again.  Unemployment merely dropped from 9.5% to last month’s 9.2% level.

So let’s recap…consumers are paying higher prices for goods and services; are receiving little to no return on savings in banks; are still battling high unemployment and are experiencing reduced wealth from dropping home prices…that QE stuff is pretty impressive.  Glad we’ve got some financial geniuses running the show.