QE2: An Unmitigated Disaster?

asiablues's picture

By Dian L. Chu

There was a debate recently between Rick Santelli of CNBC and James Bullard, President of the Federal Reserve Bank of St. Louis regarding the inflation effects of the QE2 initiative.

Bullard, the economist, cited the core inflation rate, and even the headline inflation rate as illustrative of a lack of serious inflation pressures in the US economy. Santelli, on the other hand, talked the trader`s perspective of inflation wanting to use the CRB Index (Fig. 1) as a true indication of inflation effects since QE2 was brought up at Bernanke’s Jackson Hole Speech in August 2010.

So let us compare two scenarios and ask ourselves would the US economy be doing better without the QE2 initiative?

Pre-QE2 Prices:

  1. 2.50-2.70% 10-Year Treasury Yield  
  2. $2.64 US Gasoline Price (August 2010)  
  3. Cotton Prices at $85 (Contract Size 50,000 pounds)   
  4. S&P 500 Index 1100   
  5. Copper Prices $3.25 a pound  
  6. US Dollar Index at 83.00  
  7. Lumber Prices at $200 (Futures Contract –Contract Size 110,000 board feet)  
  8. Sugar Prices at $17.50 (Futures Contract-Contract Size 112,000 Sugar #11)  
  9. Cattle Prices at $92 (Futures Contract-Contract Size 40,000 pounds)   
  10. Milk Prices at $14 (Futures Contract-Contract Size 200,000 pounds Class III)

QE2 Effects So Far:

  1. 3.50% 10-Year Treasury Yield  
  2. $3.50 US Gasoline Price  
  3. Cotton Prices at $215 (Futures Contract -50,000 pounds)  
  4. S&P 500 Index 1320  
  5. Copper Prices $4.50 a pound  
  6. US Dollar Index at 76.40  
  7. Lumber Prices at $303 (Futures Contract)  
  8. Sugar Prices at $30 (Futures Contract)  
  9. Cattle Prices at $114 (Futures Contract)  
  10. Milk Prices at $19.50 (Futures Contract)

About That Unemployment Rate...

This just gives a snapshot of some of the inflationary effects for the US consumer.  I cannot think of any argument where higher interest rates resulted from QE2 are good for the housing sector, which is the most troubled part the US economy.

Nevertheless, I must add that the unemployment rate is better, and we have created more jobs since QE2 but with a highly fluctuating job pool where workers give up looking and leave the labor market it is hard to gauge the real unemployment numbers.

Plus how much of the job creation is due to other factors like more business friendly policies from the Obama administration, a Republican Landslide in the Midterm Election, and the extension of the Bush Tax Cuts and a reduction in the payroll taxes for businesses?

Equity Gains Don’t Mean Much

The S&P 500 is 230 points higher which can be argued is good for the “wealth effect” but stocks usually have a year-end rally so some of these gains probably would have occurred even without QE2.

Clear Present Danger – Inflation

There are some substantial price increases in a lot of these inflationary metrics for both businesses and the US consumer, not to mention the reduced purchasing power of a much lower US dollar (Fig. 2).

More importantly, inflation data utilized by the core and headline rates are behind the curve of futures prices by anywhere from 3-6 months so the true inflation pass through effects of these higher input prices at the futures level have yet to be realized in the Fed`s measures of inflation data.

For example, gasoline prices at the pump probably lag the futures prices established by the RBOB contract by 20-30 cents. Likewise, the full effects of higher cotton prices will take much longer to work their way through the supply chain to consumers at the retail level for clothes they purchase. It may take another six months for the damage that has already occurred at the futures level to be fully experienced by consumers of cotton products, which would lead to an underestimate of the current inflationary effects in the economy.

Biflation at Work

It should be noted that parts of the economic data are deflationary in nature like housing and wages, which serve to artificially keep the inflation numbers utilized by the fed down--the biflation phenomenon--I previously discussed.  And if you add in the 6 month lag factor for inflation effects to pass through to the data, a completely different inflation story starts to emerge.

Wanted – Lower Inflation & Interest Rate

However, this still misses the important barometer for analyzing QE2 which should be the following question: “Which scenario is better off for the US economy?” and not any argument of what the current inflation level is in the economy.

This assumes that some inflation is better than no inflation, and I would argue that being able to finance a home mortgage at 100 bps lower, and a dollar per gallon cheaper gasoline is better for businesses and consumers, and that this scenario is far better for fostering sustainable economic growth than the current scenario of QE2 and its effects.

Really Better Off with QE 2?

So the question for Bullard misses the mark if one argues with him what the current or even future inflation effects are for the economy due to QE2. The real question for Bullard is would the US economy be performing that much better without QE2? If you add up all the pros and cons of QE2, guess which scenario would 9 out of 10 independent economists pick for an environment that fosters economic growth?

It seems regardless of what the inflation data says is the overall inflation rate in the economy, QE2 gave us all the negative, anti-growth, lowered standard of living type of inflationary effects that act as a major tax and headwind for both businesses and consumers going forward, and very little of the much needed “Record GDP Growth” and “Eye-Popping Job Creation” bang for our costly buck.

Right Back Where We Started

It seems we pretty much could have gotten this same level of current GDP growth and job creation without massively devaluing the dollar in the process. Sometimes a little patience goes a long way, and if the fed would have waited until the November elections where both the business climate and economic data were improving all on their own we could have had the best of both worlds with a low inflationary price stable environment, and a slow but steadily improving employment situation.

The real fear and irony is that once the full effects of QE2 are realized in the US economy, that we start reacting to said inflationary effects both through tightening monetary policy and consumer/business behavioral changes, and the US starts giving back some of its recent economic gains, and becomes vulnerable to the very scenario that the fed was trying to avert in the first place, a double dip, deflationary downturn in the economy.

EconForecast, March 06, 2011 | Facebook Page | Post AlertKindle

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TIMBO Anti-Castro's picture

QE2 is the logical idiotic repsonse of the corrupt FED.  Of course it won't work because it is more of the same that hasn't worked to date

"We should be embarrassed at what this country has become.  We have no backbone on so many levels.  We bail out loser businesses because they pay off politicians.  We have a FED/Treasury collusion that is one giant Ponzi scheme.  We live in constant fear of an infinitely small chance of mass terrorism.  Our army is not allowed to fight a decisive war because we don’t want to hurt anyone (in war).  We actually have a standing army that is PC (think about that).  We are currently bankrupting the country by financing foreign wars; which has spelled the decline of every great nation in history.  France and Brazil are more free market than we are.    We have forgotten what Marxist socialism really is and how it has impoverished citizens and bankrupted countries time and again.  We have not pounded the virtues of capitalism into every person so that they will know what it has done for the advancement of man.  We have allowed our freedoms to decrease in the form of nationalism and environmentalism.  We have caused great expense on the American citizen in the form of eco-responsibility all based on a theory that has not even been proven.  We have allowed the unions to highjack business and make us less competitive on many levels.  We don’t fire useless union and government employees for bad work.  All we talk about is being nice to each other like we’re in the 3rd grade.  We are complete pansies in this country and we still allow the future generations to be brainwashed into the multicultural, Kumbayah, trophy kid Xanadu that is entirely impossible and unrealistic.  No wonder each generation is worse than the prior one.  We raise our kids to fail under pressure and to ask their neighbor for help.  We even punish football players for playing football now.  And we let it all go by us while we simply complain about politicians being at fault.  They are at fault but we elected them and we did not hang them upside down when they screwed us.  We have ruined the greatest success story ever because we became complacent and forgot to educate our children."

Zero Govt's picture

Dian Chu
There shouldn't be ANY room for doubt Govt intervention has patently failed throughout economic history regards bailouts, subsidies and even tax breaks.
The last time the US Govt had a "hands off" policy was in the 1920's when it was too small (under 2% of GDP) to do anything about the recession. Sure enough the economy recovered all by itself.
Let's make no mistake the vast numbers the US Govt and Fed have directed at "recovery" has been little more than the usual Big Govt Big Corps corruption. It has all been targeted at 'Pretend & Extend' policies to bailout their buddies on Wanker Street and their other buddies in Unions and local Govt (so US citizens and small business can go to hell paying for it).
Ultimately like all Govt policies it will not work and make an already momentous problem even bigger... an historic level of Govt bailouts deserves an historically massive crash. Precisely what we'll get

Dan The Man's picture


i love the corelation gas price:10yr Tr Yd.  someone will have to look into that one...

lamont cranston's picture

QE2 is so passe. Let the QE3, 4, 5, 6, 7 ad infinitum fireworks commence.

I just knew my HS Latin & Frog would come in handy one day.

fijisailor's picture

In 2008 gas rose to $4/gallon when oil was $140.  That's a ratio of 1:35.  Now gas is $3.50 and oil is $110.  Using the 2008 ratio gas should be around $3/gallon today.  What gives?

Orly's picture

For all you commodities traders out there, get short pork bellies!

I absolutely refuse to pay eight bucks for a pound of bacon that was $2.50 just twelve weeks ago...and I know for a fact that I'm not the only one.

BigDuke6's picture

8 bucks for a pound of bacon?

here things are getting cheaper when its bought with AUD...hope u didn't short it.

well not really but its taking the sting off petrol pain.

and my napalm bill.


boeing747's picture

Holy*&@? one oz Silver Panda coin on ebay ended at $51.49. I got 3 Eagles this friday at $127.5. All QEs were designed to pass loss from Real Estate to real economy because real economy has to suffer less capitals and demands and higher materials and operation costs. How do you expect economy can quickly recover and create jobs this way? For Ben, even you can inflat house prices back to 2007 level but the full amount you collect from a paid off loan worths only half of 2007 dollar, so you still are 50% loser. Oh, I see what QE tries to do is to prevent related Derivates disasters which are 20x, 50x or 200x bigger of 50% loss.

RockyRacoon's picture

I had about a dozen 1 oz silver rounds close this evening in individual auctions and they all brought over $39 each, a couple over $40.  The highest at $42.99.   Now that's a silver market when you consider that these were generic .999 silver rounds.   Of course, there are some who would wonder why a dealer would SELL silver or gold and not keep it greedily for themselves.  My average cost on these which I've had for 10 years or more was under $7 each.   That's why we sell them.

Sudden Debt's picture

This weekend I was planning to sell 150 oz rounds canadian wolfs 2011 to pay for my other bids. If I where to get the spot price I've would have made 30% gains on buying my bids.

I've cancelled my auctions and I'm planning to pay with them with the profits I'll cash in from my turbo's and speeders on silver.

This morning when I've seen silver go up 3,5% was enough as my turbo's have a 28 hedge.

I'm glad I didn' t sell them.


RockyRacoon's picture

Well, we each have our objectives.   Mine is to roll the generic silver into Silver Eagles.

Better for the coming tsunami of inflation/deflation/biflation/stagflation, or perhaps something else.

LasVegasDave's picture

Silver up almost a buck overnight, gold up $9.50, Oil up another buck and a quarter

There's no place like home

There's no place like home

There's no place like home


brown_hornet's picture

Mrs. hornet got a coupon for $10 off if she spends $50 from the local grocer.  Keeps her from rioting for at least another week.

Ned Zeppelin's picture

" It seems regardless of what the inflation data says is the overall inflation rate in the economy, QE2 gave us all the negative, anti-growth, lowered standard of living type of inflationary effects that act as a major tax and headwind for both businesses and consumers going forward, and very little of the much needed “Record GDP Growth” and “Eye-Popping Job Creation” bang for our costly buck. "

So, that being said, who benefited from these policies, since the reasons offered in support of these policies were pure lies? My favorite lie now making the rounds is the one about the the 2008 crash being caused by terrorists.  Duh. And there were WMDs in Iraq, Saddam was behind 9/11, and Rummy is an American hero. 

No shortage of bullshit, that's for sure. 

Milton Waddams's picture

Primary dealers obviously. Less obvious might be pension plans, retirement plans, insurance companies and the like. In other words investment capital relying on assumptions that the market would average a return of 7%-10% per year forever. The first bear market of the last decade damaged those assumptions, the crash obliterated them, and at the worst possible time, just as the first baby boomers were approaching retirement age.

My favorite lie now making the rounds is the one about the the 2008 crash being caused by terrorists.

I wonder if that lie has a connection to this -> http://www.youtube.com/watch?v=f4MeiF3p1WQ&t=10m12s

apberusdisvet's picture

DOUBLE DIP? We are still partaking of the first one.

f16hoser's picture

Get out of paper and into commodities. I don't know what else to do. 30,000 DOW and a 3000 S&P don't mean shit if a loaf of bread cost's $100.00.......

Rogerwilco's picture

"Get out of paper and into commodities."

Bernanke's QE has doubled equities off the 3/09 lows. Great for banks and pension funds. He has also run up commodities and we're starting to see interest rates move higher. Bad news for consumers and Mr. Obama.

The Fed can pull liquidity anytime they want and crash the markets. As in 2008, commodities will fall, and money will flow into treasuries, boosting the dollar and lowering interest rates. Since 2012 is an election year, I can see Bernanke asking the banks to give back some of their huge gains in equities so he and Obama can take credit for $1.75 gasoline and 4% mortgage rates in the Fall of 2012. After the election he can restart QE and "fix" everything again.

These are not stupid men. Evil, misguided, but not stupid. Being invested in commodities and PMs when Bernanke pulls the plug may not be a good idea.

Meme Iamfurst's picture

I can not quite make up my mind if the international power elites intend to surprise everyone, suddenly pull the old switcheroo ( having invested in the opposite trade and having the power to make that trade happen) or if 'they' decided to move on to greener pastures...China and Asia.  I'll just Ben and Timmy know what the Goldman alumina have planned.

Bartanist's picture

It seems that there is not a whole heck of a lot more liquidity in the market. One can argue the exact OPPOSITE.

The Fed is requiring the banks to post reserves to the Fed, decreasing the amount of money they lend. They are also decreasing their leverage.

The FDIC continues to close banks at brisk clip.

People are not being given more credit, nor are they being allowed to climb out of debt, so they are stuck.

The money is only going to the insiders, who have no need or desire to change, yet. There seem to be those with the globalist agenda and those that are happy to be given inside information and special deals to do the bidding of the globalists.

It is very easy to see their real intent by their actions. All we need to do is turn off the sound and watch... that way their lies can't tempt us.


ebworthen's picture


Good points.

Besides, they want inflation to deflate the debt on the FED and bankster balance sheets.

As long as they give the signal to the big boys before they pull the plug the only losers will be the Amerikan public and other outsiders.


fragrantdingleberry's picture

The Fed is a creature of the banks. It's doing its masters' bidding, recapitalizing them so they can live to fleece the public another day.

Arch Duke Ferdinand's picture

""The Fed is a creature of the banks. It's doing its masters' bidding, recapitalizing them so they can live to fleece the public another day.""

....and Big Pharma's Offshore facilities in China too?....


Coldfire's picture

Arguing whether or not Bermonkey is getting the central planning right is a waste of time. Any Fed action ultimately fails in its stated purpose because of Hayek's fatal conceit. And when the Fed is buried (how long Lord, how long?) the real shock will be how well we will get along without it.

locinvestor's picture

The real unemployment rate is much higher. As for inflation vs. deflation, just try and deal with the latest prices at your neighborhood stores. How many do you go to to try and get the best deals that you can? I go to at least three.

Another key point not mentioned? Paying off the actual national debt. How long have we known that there are trillions in "toxic debts" globally? Yet, nobody has any idea what the actual number is. Nobody's forcing the Fed to make the banks finally disclose this number. In addition, we've nationalized some key industries. But we can never say nationalized because that's the same as that other evil word socialism.

This is something that Santelli and the rest of the corporate MSM will never ever bring up. How are you going to pay off this debt? The answer: you never will. Nobody's willing to take the necessary steps.

This then means a guranteed market for all of those "explosive bestsellers that tell you the real inside story of what's going on in the markets". Do we really need another one?

China, our #1 creditor is laughing whenever Geithner or Obama come to beg for money. That's exactly what they're doing. If you were the Chinese govt., why would you want to lend to the States?

It's a totally irresponsible govt.

Unchecked borrowing and spending.

Two illegal and unsustainable wars (now Libya is #3?).

The only advantages at this point are it's still an investment (in infrastructure, etc.). The global economy would panic if The Dollar disappeared. Therefore, it's still in their best economic interests to maintain their trillions of dollars in reserves.

All the more reasons to go elswhere for your accurate news.



MayIMommaDogFace2theBananaPatch's picture

China, our #1 creditor

Oops -- better check that again.

Cleanclog's picture

I anticipate another 4+ years of serious economic downdraft and then a very very slow slog out of the depths.  Take care of the basics, that's all we'll be able to do.  Food, water, roof, education and some medicine.

sundarb's picture

QE2′s publicly stated intended effect has never been achieved. Unemployment if measured correctly is alarmingly high. What QE2 has achieved though is the risk-free profits for bond speculators. You cannot be a known buyer for hundreds of billions of dollars and get a good deal. so I cannot really believe that the Fed got the best price for the bonds they bought. The primary dealers must have made excellent, risk-free profits.

As a result, when they stop QE – I think we will see a market crash. It will be deflationary. That which the Fed absolutely doesn’t want to happen, is likely to happen.

geno-econ's picture

Asiablues just described the breaking point. Can we kick the can further down the road ?  If not, batton down the hatches !  Yes , I heard the argument the British Empire kept it going for 200 years.

dick cheneys ghost's picture

somehow we can afford a $1.2 trillion military budget for fiscal 2012.



ZackAttack's picture

Guess someone who works for a defense contractor that junked you.

I'm sure grandma and grandpa won't mind taking a big juicy bite from the shit sandwich so we can pay for that $389 billion F35 program. It will definitely be a big help against those teenagers with AKs.

John Law Lives's picture

The employment data from the BLS is BS.  They are not counting those whose US benefits expired and dropped off the rolls.  The true unemployment rate is substantially higher.

Azannoth's picture

We will go from eating dog/cat food to eating dogs and cats for food and than when that runs out we'll go after the neighbours, canibalism is only a function of how hungry you are