We’ve heard all about QE3. That’s the culmination of last week’s decision by the Fed to buy billions of dollars in bonds to jumpstart the economy. The thing is – we’re in new territory. Nothing like this has ever happened when it comes to the American economy and that’s why so many people are more than slightly concerned – they don’t know what it’s going to mean for their bottom lines. What does all this hype mean for you and me and your next door neighbor? Are things going to magically improve? It’s doubtful. Then will things begin to deteriorate for John Q. Taxpayer? It’s likely.
By now, since the dust has settled, there’s a good chance you’re hearing a word that so far has managed to lay dormant in the minds of economists: inflation. Therein lies the problem. Most financial analysts we’ve spoke to say it might as well be a sure thing.
As mentioned, Fed Chairman Ben Bernanke announced last week that phase three of its plan is to buy $40 billion in mortgage back securities every month “until”. Until what? No one knows. No one knows, either, the long term effects and worse, no one even knows if this latest round of spending will even spur the economy. Is Wall Street, the federal government and even the Obama Administration out of touch with the average consumer?
Quantitative Easing
Remember, the “QE” stands for “quantitative easing”. The “3”, of course, symbolizes the third round of efforts. And those efforts are incredibly expensive. The goal is to drive down interest rates. The belief is that this will build our confidence in the economy and send us out on spending sprees, house buying junkets and nights out on the town. The problem with that theory is that interest rates were already historically low. That didn’t inspire us then and it’s not going to inspire us now; not with all the uncertainty in other areas of the economy.
People don’t know who to trust. In fact, people don’t even trust the media – and for good reason. Let’s face it – the media has lost its purpose. There was a time when things were the way they should be: just the facts. We didn’t have opinionated talking heads feeding us sound bites in order to get us to tune in to hear their versions of the “rest of the story”. We didn’t have media wars and trash talking among the networks either. Now, though, they’re bickering as much and as often as the politicians themselves. There is no barrier of trust.
In July, consumer spending was way down – in fact, it surprised even the economists. The fact is, people are keeping their credit cards close. The holidays are approaching, millions of American still have no jobs and a record number are turning to government assistance for the first time in their lives. They’re not buying houses. Many Americans can’t afford to buy groceries – no, they’re certainly not buying houses. They’re not refinancing either. Too many are upside down in their mortgages and they have no equity since they might have refinances a few years ago when the writing hit the wall and the recession charged at us with no let up. Most consumers are hoping that they can work with their bank for a re-modification loan – but they’re not refinancing. It’s just that simple.
No Time Out
What makes QE3 a bit disturbing is that the Fed has defined no time parameters – it says it will keep buying them. Chairman Ben Bernanke stated buying mortgage-backed securities will continue until “the U.S. labor market improves substantially”. We just wonder how long he thinks that might be. Then, of course, there’s that pesky inflation to think about. When that much new money is pumped into an economy, there’s a significant risk of inflation.
Currently, our inflation hovers around 1.7%. That’s completely reasonable and surprisingly low. Since the two earlier rounds of quantitative easing haven’t resulted in any significant pressure, there’s a greater chance this third round will awaken the inflation beast. If it’s successful, odds are, we’ll begin to see inflation increase at an alarming rate. What does that mean? Remember last week when you were complaining about rising food costs? That jar of mayonnaise cost $2.19 back in the spring and now costs $3.29? Guess what? Expect to pay $3.99 once inflation kicks in.
Our clothing costs, that new bestseller we have been waiting for, what we pay to see a movie, how much we pay the kid next door to cut our lawns (if he’s smart, he’ll know this is a golden opportunity for him). Everything will go up. Oh, and oil? Yes -t hat too. Look for it to hit at about $150 a barrel, which will equate $5 per gallon at the gas pumps. Credit card interest? Definitely – but the good news is the 2009 CARD Act requires your carrier to notify you well in advance its intentions of raising APR. At least that helps, right?
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