Sunday, July 17, 2011

Prediction on Further Quantitative Easing

Last week, Fed Chairman Ben Bernanke admitted in front of Congress that a third round of Quantitative Easing (AKA further devaluing of the dollar) is among the Fed's plans for the future.

This really doesn't surprise anyone who has a clue about the truth of the current propped up economy that is bound to bust sooner rather than later, even though Bernanke backpedaled from that stance the next day.

So, we now know what most of us have know for a while: QE3 is in the works. The only question is when it will be implemented (how it will be implemented is immaterial).

I will now make my first major economic prediction as writer of PoK and it ties in to the ongoing farce of a "debate" on the debt ceiling:

1. A deal will be made, on or before the August 2nd deadline.

2. In that deal, there will be miniscule baseline budget cuts across the board. - What this means is that there won't be real spending cuts, just not as much spending as there would be otherwise. And since it will be across the board, there will hardly be an impact in specific agencies that are ailing the American economy, like Medicare.

3. The deal will also include minimal to negligible tax increases, or as they're now calling it "closing tax loopholes."

So what do all these steps mean? It means we will have continued outlandish spending without any revenue to cover for it because of a lack of large tax increases. This means we will spend more without any money coming in to pay for it.

So, it leads us to the question: How will we cover this continued spending since there is no increase in revenue? The answer? You got it. Quantitative Easing. Quantitative easing, or QE3, will take place as an attempt to boost aggregate demand and cover this increase in federal debt.

The debt deal will take place just in time for the August 9th Federal Open Market Committee (FOMC) meeting. In that meeting they will discuss how they will cover the increased spending with further easing but it won't yet be implemented. Publicly, Bernanke will probably announce that the Fed is awaiting further economic data to see how the economy reacts to the debt deal, or something like that, before taking any action.

Then, by the time the September 20th FOMC meeting takes place, the Fed will have seen enough negative economic data and will then announce QE3.

So, there you have it: my prediction on how the Fed will implement QE3. Am I betting any money on this? Probably not. Please remember I'm only an undergrad. However, this prediction is based on a few things: past Fed behavior, the current and near term state of the American economy, and Washington politics. I believe this bet isn't bad. And if I do get it right, maybe they'll have to have me on CNBC instead of that joke Jared Bernstein.

No comments:

Post a Comment