An Alternative to Printing 600 Billion Dollars
Across the world legions of financiers balked at Ben Bernanke’s decision to lift the lid off the steaming pot of the American economy. The Federal Reserve will soon pump $600 billion dollars into the US banking system as a way to jumpstart the small business, housing, and financial lending of America’s banks. Read More
Most fear that the result will be a distortion effect on the US economy, creating waves of problems in the future. While the alternatives seem few, we definitely have to consider how we came to need this type of economic easing in the first place. Will this easement encourage the already bullish market or will it stifle and reverse signals to the contrary?
To answer how quantitative easing (QE) will effect stock prices, we first need to understand exactly what the Federal Reserve intends to do. In a nutshell, they intend to print money. More specifically, they are printing $600 billion dollars in order to buy U.S. Treasury bonds that will then go back into the banking system. The newly created money will ease the burden on the banks and allow them to once again begin lending to a loan starved nation. Ideally, that’s how it would work.
The problem lies with the approach to the problem, not particularly that QE cannot work in any economic climate. As Babak of Trader’s Narrative puts it, “Clearly, it is not in the long term interest of the average US consumer to simply put the economy back on the same track that it was before without addressing at a fundamental level why it went off the rails so spectacularly.” And the derailment Babak speaks of led to many other consumer sentiment changes towards excessive spending, signature debt, and home buying.
We are currently amidst record unemployment, a housing crisis, and a bull market. Which do you think will be changed by devaluing the dollar and pumping money into the economy? The stock market may see a surge as consumers and working class people see the immediate benefits of the bank loans, but it’s only fair to assume that the underlying problems will remain. The QE will forge an illusionary gain and possibly setup certain assets to falter.
Bernanke believes the influx of cash will push the economy rapidly forward, promoting growth and increasing stocks’ value as a result. The future he sees may be around the corner, but to realize those gains, we need to see the unemployment rate decrease and more homes being bought. Otherwise the rapid decline of the dollar’s value may have an adverse effect on the overall market.
