Bernanke rules out QE3 – for now

July 15, 2011

Global Macro

Markets were off a little overnight because Fed Chairman noted that the Fed wasn’t yet ready to execute another round of quantitative easing. I did find the previous night’s rally a bit worrying insofar as that i think if QE3 is needed to buoy things then the market is clutching at straws. The reason I say that is that if it is only free money and lots of it (quantitative easing) coupled with the debasement of the USD that is keeping markets up then that is about as sustainable as the situation in Greece at the moment.

Whether its sovereign debt or current equity market levels in both cases the solution seeks to simply ignore the reality of what is actually happening in the economy or is going to happen in favour of trying to, for want of a better phrase, kick the can down the road.

Specifically the US equity market can’t ignore forever the fact that the economy is weak. Unemployment crucially under-employment remain high in the US at the moment meaning that US companies have been hitting profit targets in many cases by squeezing employees. That’s good for productivity but not for the social fabric of the nation where more than 44.6 million people are still living on what is colloquially called “food stamps”.

That’s about 14.3% of the population of the united States.

It is as if many of the gains of the past couple of hundred years since the industrial revolution are being unwound before our eyes and the equality and equanimity that the flattening of the wealth structure brought to western developed democracies and economies is being replaced with a massive rich-poor divide. Everything about the bailout of Wall Street and what has gone on since seems to increase this divide and put more on more pressure on average Americans and their families. Now with the wrangles over the US debt ceiling and looming austerity measures in the US it seems that thinks can only really worsen again given the outlook and the fact that housing is once again falling

But back to what Bernanke said “We’re not prepared at this point to take further action” in contrast to yesterday’s “we have to keep all the options on the table”. As you can see neither of these statements is inconsistent with the other but the fact that he also said that the US was at a different, more complex, juncture now than it was back in August 2008 means that QE3 is further away than markets thought.

In some ways that’s a good thing because like European politicians markets need a does of reality – in the long run it’s better for all of us if we deal with the issues now.

I’m on the road still so I’ve kept this brief but the US and Europe have some real challenges ahead of them. We have our own challenges with a bifurcated economy at home but thankfully its different here in Australia.

 

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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