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Topics  Investing

Bye QE2, hello QE3?

By Larry MacDonald  | May 20, 2011
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(Photo: Nick M Do/Getty)

What happens after QE2 expires in June? How about QE3, a third round of quantitative easing from the Federal Reserve? I hadn’t thought of this possibility until CIBC World Markets strategist Peter Gibson ruminated about it during a chat on the phone last week. Look at how 10-year U.S. treasury yields — as I recall him saying — have “collapsed” from 3.8% to 3.2%, and the U.S dollar has weakened considerably.

These things shouldn’t be happening if the U.S. economy is picking up steam. In fact, they may be indicating the U.S. economy is on the path back to stagnation. Look at key sectors such as housing: they seem to be getting worse, with house prices again in freefall and now back to the bottoms of 2008 and 2009.

Google “QE3” and a rather large number of hits turn up. Of note was a piece from Zero Hedge discussing calls for more monetary stimulus, from Princeton economist Alan Binder (recovery needs more jobs to keep going) and from Goldman Sachs analyst Sven Jari Stehn (need to offset the fiscal drag of budget cuts).

On CNBC, a market strategist said QE3 was unavoidable because of “headwinds facing the global economy” and the financial wreckage of U.S. states such as California. The Financial Times of London published this week an article entitled ‘There will be more monetary elixir after the end of QE2,’ in which the author noted the Taylor Rule for setting Fed rates called for negative levels.

 

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