Bernanke's QE Stretching and the Greenback

Tuesday, November 20, 2012

Bernanke's QE Stretching and the Greenback

Ben Bernanke, the chairman of the Federal Reserve, has decided to purchase $40 billion in mortgage-backed securities until the unemployment rate falls to a more desirable level. This round of asset purchases by the central bank has been dubbed QE3, since it is the third round of quantitative easing intended to stimulate the U.S. economy. The economy has been growing very slowly following the banking crisis of 2008, which came as a result of the collapse of the real estate market.

 2008 Actions

Following the banking crisis of 2008, the Fed announced it would purchase $1.25 trillion in mortgage-backed securities in order to bring liquidity to the real estate market and prevent its further deterioration. The effect of this first round of quantitative easing was to keep interest rates on mortgages artificially low in order to allow the market to recover. Given that home values are tied to wealth perception among American consumers, the Fed believed that supporting the real estate market would also boost general consumption in the economy. A major drawback of this policy was the debasement of the U.S. dollar, which fell in value compared to other currencies as well as major commodities such as oil, agricultural products and precious metals. This debasement was the result of the increase in the money supply by the Fed in order to purchase these securities.

 2010 Actions

In 2010, the Fed announced that it would purchase $600 billion in Treasuries to keep interest rates low and stimulate the economy. By lowering interest rates, the Fed intended to encourage banks to loan more money to consumers and invest in businesses rather than in Treasuries. As a result of this second round of quantitative easing, the dollar continued to lose value compared to other currencies, and commodities such as oil, agricultural products and precious metals. Some nations, particularly China and Brazil, vehemently protested the artificial cheapening of the dollar, which made their exports more expensive and therefore, less competitive to Americans. 

 QE3 Actions

With the recent Fed announcement of open-ended quantitative easing involving the purchase of $40 billion in mortgage-backed securities each month in what has been referred to as QE3, critics of the Fed have voiced concerns about the further debasement of the dollar and inflationary pressures that will result due to increasing the money supply to purchase these securities. The Fed hopes to stimulate the broader economy by supporting the real estate market with artificially lower rates, and thus lower the unemployment rate to about 7 percent by the end of 2014. 

Some nations, including China, Brazil and Japan, have decided to cheapen their currencies as a result in order to support their exports. James Rickards, an economist and the bestselling author of Currency Wars, believes that nations will continue to cheapen their currencies to make their exports more competitive, and that ultimately the flooding of the world with currencies may lead to their collapse, including that of the dollar. A dollar collapse would lead to hyperinflation, in which case the prices of goods and services would skyrocket as the value of the dollar dropped to a mere fraction of what it was before the collapse.

Despite concerns of dollar devaluation as a result of QE3, the Fed is confident that its policies will encourage economic growth and that a currency collapse will not occur. Given that the inflationary effects of quantitative easing may take years to become evident, it will likely take some time before the effects of QE3 are fully understood.  


Bloomberg: Bernanke Seen Attacking Jobless Rate with QE Through 2013
 GoldMoney (Youtube): James G. Rickards talks to James Turk
 CNN Money: Federal Reserve Launches QE3
 CNN Money: QE2: Fed Pulls the Trigger
 London Telegraph: Federal Reserve Announces QE3 to Aid US Recovery

  About the author: 

Stacy Pruitt is an avid currencies and metals researcher and trader. Stacy is currently writing a book on Forex trading strategies and trading robots. She enjoys sharing her insights and tips on various trading blogs.

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