A client writes, “You mentioned in your latest commentary that deflation
would rear its ugly head if QE were limited. Do you think QE is the solution to keeping
the stock market inflated and also the economy?
I fear that QE isn’t the solution – maybe for the stock market – but not
for Main Street.”
It’s doubtful that the Fed’s quantitative easing (QE) policy
can heal the wounds inflicted upon the economy by the 2007-2008 credit
crisis. This may not have even been
Bernanke’s intention when QE was initiated back in 2008. The principle reason for QE was to provide
the banking system with needed liquidity and to also satisfy the world’s
insatiable demand for money. In that
regard QE was a success.
QE was mildly helpful in stimulating business activity via
the trickle-down effect, though it has far from reinvigorated the economy. More than anything, QE has help to keep
deflation at bay by allowing the financial system to stabilize and recover
after the devastation of the credit crash.
The financial sector is the lifeblood of the economy and as long as it
has abundant cheap liquidity at its disposal, businesses have no imminent fear
of falling profits/prices.
The coming end of QE changes this equation. The economy will be forced to reckon with the
“hard down” deflationary forces of the 120-year cycle next year without the aid
of central bank stimulus. It would be
surprising to say the least if the financial market and the economy can weather
this storm without QE’s assistance.
You are correct that QE isn't the answer for Main
Street (though it has certainly helped somewhat). IMO, the Fed should
consider letting QE continue until at least the end of 2014 when the cycle
bottoms; after all, why stop now when they've kept it going for five years?
The Fed could then let the economy finish the healing process on its own
when a new long-term inflationary cycle begins in 2015.
