QE3 has finally arrived: the US Federal Reserve has promised to buy US$40 billion of mortgage-backed securities a month for as long as it deems necessary to revive the economy. QE3 is QE Infinity! Will it end with a thriving economy or a catastrophe? Remember, it was former Fed chairman Alan Greenspan’s “Midas touch” that brought us the dotcom bubble, the property and financial bubble, and the global financial crisis. Will Ben Bernanke’s so-called “quantitative easing” take us to a better world?
The mere fact that this is the third round of quantitative easing tells us the limited effectiveness of such a policy. Between February 2008 and August 2010, the US economy lost 8.7 million jobs, though it has gained 3.4 million back. By contrast, between 2004 and 2007, the US economy created an average of about 2 million jobs a year. The Fed bought US$1.6 trillion of assets through the first two rounds of quantitative easing.
Yet, still, the US labour market hasn’t performed. Of course, one could always argue that it would have been much worse without the Fed’s action. We will never know.
What we do know is that food and oil prices have been rapidly rising despite a weak world economy. Statisticians in the US and China don’t see much inflation. Yes, the price of my bowl of beef rice may be the same, but the beef on the rice has been performing a vanishing act. Do the statisticians feel hungry?