When Fed QE Goes Bust - Real Time Insight

By Zacks.com,  July 16, 2012, 02:46:57 PM EDT

I'll admit it. I've been a Keynesian. To me, pumping money into the economy, and monetizing debt through quantitiatve easing (i.e., printing new money), was the best course of action since 2008 because the alternative -- a Japan-style deflationary spiral -- was unacceptable and entirely avoidable. Inflation, of any amount, was worth all the risks.

But something curious is going on. The economy is not recovering in a robust way. After today's disappointing retail sales trend continued, Goldman Sachs lowered their 2Q GDP estimate another 2/10ths to 1.1%. They had dropped it to 1.3% from 1.6% just last week on more dismal economic data.

Yet financial markets -- stocks, bonds, gold, commodity prices -- seem to really benefit from QE. Below is a chart from a group called Phoenix Capital Research which plots the S&P 500 index minus the 24-hour pre-FOMC price ramps.

Granted there are other ways of looking at the effectiveness of QE on both markets and the economy. But today I am wondering if QE is still a necessary evil, or if it's actually distorting markets and could possibly damage the long-run health of the economy.

What do you see for the next 6-18 months of the US economy, with or without QE?


 
CRYSHS-AUS DOLR (FXA): ETF Research Reports
 
CRYSHS-EURO TR (FXE): ETF Research Reports
 
SPDR-GOLD TRUST (GLD): ETF Research Reports
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
US-OIL FUND LP (USO): ETF Research Reports
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.


This article appears in: Investing, Stocks

Referenced Stocks: FXA, FXE, GLD, SPY, USO



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