Chairman Bernanke formally announced QE3, finally. This round will include buying mortgage backed securities to the tune of $40billion/month. Operation Twist will remain in place as well. Both of these decisions have the goal of decreasing unemployment by keeping interest rates low through 2015. A total of $85billion/month will be added to the Fed’s balance sheet.
This will lead to more speculation in the housing market. Home values will rise as sales increase and building picks up leading to yet another housing bubble, but probably to a lesser extent than the bubble leading up to the 2008 crash. The only benefit will be that some homeowners who currently possess an underwater mortgage may have an opportunity to sell or refinance and get a more affordable mortgage. Not all of the capital freed up by this action will go back into the housing market; some have learned their lesson.
Most small businesses will continue to weather the economic storm by cutting costs and saving capital; they’ve shifted their growth to the future because of the uncertain economic and political climate. This means demand for Capital is low and therefore Investing is low. Because of that, much of the freed up Capital will go into commodities(gold, silver, gas, food, etc) and other value assets and some will go overseas for investment in emerging markets. These moves are to hedge against the coming inflation. Investment in commodities, combined with an already poor economy, ongoing and impending war, and natural shortages (caused by drought, storms, etc) will force the cost of living up. This will drive overall demand down. The middle and lower class families will feel it the most. Much more inflation is coming. Investors know this, and so does Bernanke.
Ultimately, these actions will hurt the economy more than help it. This encourages risky borrowing and muddies the markets as to what the real risks are for any given financial endeavor. The ensuing crash will be worse than 2008. This impending reality is made worse by the uncertainty in our global socio-economic climate. War with Iran is on the horizon, the Presidential election holds the economy hostage, and the question of who will be the next FED chairman lingers until November as well. And there’s Europe and the Euro to worry about. The stock market will see a short bump that may help President Obama’s election outlook, but this election isn’t about the markets. This solution to our current economic state lies with the cogs of our economy, the people who own businesses and take risks to create value for society.