Back to Reality

Now that the mid-term elections are over, it is time to get back to reality. Just because House Minority Leader John Boehner is taking over for Nancy Pelosi as Speaker of the House doesn’t mean the economy will get better. Yes, the Republicans can now, pretty much, put the kibosh on the Obama agenda with big victories in the House and Senate, but is that enough to turn things around? In a word–no.

The economy is functioning so poorly the Federal Reserve has widely telegraphed it will start another round of Quantitative Easing. It has been jokingly called “QE2” by the financial press. What is QE2? It is more Fed money printing to finance the country and revive the economy. This kind of QE has never been done before in human history on this scale. How much money will the Fed print? The consensus among many economists is $500 billion, but that is just a start. Yesterday, Reuters warned, “Fed Chairman Ben Bernanke has said long-term asset purchases are an effective way to lower borrowing costs when rates are near zero, but a program of this size and scope is untested and many worry further expansion of the Fed’s balance sheet sets the stage for inflation or another asset bubble.” (Click here for the complete Reuters story.)

The Fed will start small but leave its plan of action open-ended. In other words, it will commit to print as much as needed to buy treasuries and mortgage-backed securities to get the economy going again. One senior currency trader at HSBC, Daniel Hui, said on Bloomberg last week, “We think the eventual expansion of QE could be as large as $2 trillion if the Fed is serious about preventing deflation.” (Click here for the entire Bloomberg interview.)

Citywire, a British publication, is one of many media outlets reporting that Goldman Sachs wants twice that amount of QE. It reports, “The bank said that based on its own analysis the Fed ought to pump in a further $4 trillion in order to achieve the monetary easing the economy needs. . . “ (Click here for the complete Citywire story.)

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