Ron Paul QE3 Predictions Are Already Proving to be Correct


It has been nearly two weeks since Federal Reserve Chairman Ben Bernanke announced that the Fed would engage in another round of "quantitative easing" (QE3) by purchasing $40 billion in mortgage-backed securities (MGS) a month for the indefinite future and would be leaving interest rates near zero for the next few years.

Longtime Fed opponent and the staunch critic of Fed monetary policy Ron Paul issued a statement the next day regarding Bernanke's actions.

"No one is surprised by the Fed’s action today to inject even more money into the economy through additional asset purchases, " Paul said. "The Fed’s only solution for every problem is to print more money and provide more liquidity. Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system."

It hasn't even been a month yet since the Fed made their QE3 announcement, but Paul's Austrian-based analysis would suggest that it will only continue to make things worse. By further devaluing the dollar, buying up near-worthless debt, and keeping interest rates near zero, the Fed is sending terrible signals to the economy while simultaneously not allowing the debt and malinvestment to be liquidated. Without this necessary correction, true economic production and growth can not be achieved. Paul's recommendation of a "strong dollar and market interest rates" is once again being unheeded.

When QE3 was right around the corner, I argued in a PolicyMic article that "monetary injections" by the Fed tend to give the economy a short-term boost at the expense of steady, long-term economic growth (especially in election seasons when it is politically popular) and that Wall Street will do just fine since it is largely their paper assets and bad debts that will be propped up. But in the relatively short time since QE3 has been enacted, even the predictable short-term boost to the economy that defenders and proponents of monetary stimulus claim will result are already falling short.

The Fed's decision to buy up mortgage bonds has predictably lowered mortgage yields while inflation-protected bonds (TIP) have risen slowly. This means that QE3 is effectively making it harder for the U.S. government to borrow money — something that the U.S. government is doing a lot of simply to stay afloat, and the exact opposite of what Bernanke has intended to do. But the benefit of a slight drop in mortgage yields thanks to the Fed purchases of MGS is heavily outweighed by the increase in the yield of government bonds.

In other words, when the Fed buys bonds and the bonds actually go down in price, the bonds are being priced with the expectation of a wave of inflation in mind. Bernanke and QE3 may well be heading us down the road to stagflation. Judging by these factors alone, QE3 has failed even in its attempt to provide a quick boom and backstop.

Besides, even with the drop in mortgage yields, home prices are continuing to rise even though the market is signaling that they need to drastically fall and clear. This is another sign that the Fed and QE3 are preventing the corrections that are needed by artificially keeping the prices of houses too high.

So is Ron Paul right to be worried about the future of the economy after QE3?

If one cares about a sound economy backed by economic growth, production, savings, and interest rates that reflect all three, then he is absolutely right.

But in a way, QE3 is an absolute success. Not for you or I, of course, as we watch our dollars fall in value and a shrinking economic pie. But in the way that it will continue to mask the financial mess that the U.S. government is in — $11 trillion annual increases in the national debt, nearly 20% unemployment, and war after war — QE3 has done its job.