Re: Microtrader asking about QE 3 and 4. Thanks for your...

Re: Microtrader asking about QE 3 and 4.

Thanks for your compliment.

The reason I think QE 3 and 4 are inevitable is because I don't think the US economy can stand the withdrawal of the impetus given to GDP given by government spending. In other words, if the US government does cut its spending, the US economy will go in reverse. In which case, the US Fed will be under huge pressure to greatly increase liquidity into their economy to make up the short fall for what will effectively be a big deflationary event. Hence QE 3 and probably QE 4.

If the US government does not decrease its spending/raise taxes then the US public debt will balloon even further out of control than what it has already. This will precipitate huge problems in areas like the US sharemarkets which will probably devalue/deflate at a fairly rapid rate. This will make the US Fed try to reflate sharemarkets by printing money, which is effectively QE 3 and 4 and so on.

In either scenario QE 3 and 4 lie down the track - what we will see first is a struggling US economy (which is what we are already seeing - struggling because it is basically still delevering from the credit bubble that caused the GFC - the US consumer is not borrowing now because they already owe a lot of money) and then a political impetus to address the economy. Note 2012 is the Presidential election - but the US President and the US Congress can't pork-barrell in the lead up to these elections because of the debt issues in their budget. The only way they can spend money to get re-elected without it seeming like they are spending money is via the US Fed and its quantitative easing programs. This will give the illusion to the US voter that "things are on the mend", as the extra liquidity will find its way into risk assets like the US sharemarket (although they are also as a result getting hammmered by inflation). In other words, QE 3 is down the track because it will be politically expedient.

Obviously, this will probably mean huge swings in the riskiest assets like commodities - commodities hate a deflationary scenario but love an inflationary one. The last major deflationary event we had was the GFC - oil crashed to around $30 US a barrell - gold went down about 30% in price, for example. But these bubbles reflated after the GFC because of the inflationary environment provided by QE's 1 and 2 and other stimulus programs introduced by other central banks across the globe in response to the GFC.

In other words, I think commodities will probably crash in prce at some stage, along with every other hard asset - but soon after will probably start to climb in price extremely rapidly, as they did after the GFC.

I hope this answers your question.