{"id":30401,"date":"2012-06-22T00:05:41","date_gmt":"2012-06-22T04:05:41","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/why-more-qe-is-coming\/"},"modified":"2012-06-22T00:05:41","modified_gmt":"2012-06-22T04:05:41","slug":"why-more-qe-is-coming","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/22\/why-more-qe-is-coming\/","title":{"rendered":"Why More QE Is Coming"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

The outlook is gloomy for investors hanging on for the next QE<\/strong>.<\/p>\n

Investors are starting to realise that Sunday\u2019s Greek election<\/a> result was about the worst outcome they could have ended up with.<\/p>\n

If Greece had out-and-out rejected austerity, we\u2019d have had some panic – but we might have had some progress too.<\/p>\n

Faced with plunging markets and the threat of an imminent Greek exit,<\/a> central bankers around the world would have had their fingers poised over the \u2018print\u2019 button. Perhaps the Europeans might even have felt a bit of pressure to make something resembling a concrete decision.<\/p>\n

<\/span><\/p>\n

As it stands, Greece\u2019s indecision has left markets in limbo. Things aren\u2019t great, but the threat of a Lehman moment has passed. That means central bankers just can\u2019t justify another spending spree.<\/p>\n

Federal Reserve chief Ben Bernanke<\/a> still tried to toss investors a bone. But the market sulkily spat it right back at him\u2026<\/p>\n

The Fed hasn\u2019t pressed the emergency button \u2013 yet.<\/p>\n

Operation Twist – in Place of QE3 <\/h3>\n

<\/center><\/p>\n

Instead of printing more money \u2013 QE3 \u2013 the Federal Reserve has opted to extend ‘Operation Twist’, which was originally meant to finish at the end of this month.<\/p>\n

\u2018Twist\u2019 involves the Fed trying to keep longer-term interest rates down; it does this by selling short-term debt and using the funds to buy US Treasuries<\/a> with maturities of six to 30 years.<\/p>\n

So \u201cTwisting\u201d doesn\u2019t add more money to the system, it just takes it out of one end and puts it in at another. Trying to suppress interest rates over a longer period should \u2018help to make broader financial conditions more accommodative,\u2019 as the Fed puts it – but it doesn\u2019t provide the caffeine jolt of fresh new money that the markets clearly crave.<\/p>\n

Investors probably shouldn\u2019t have been as surprised as they were – the fact is, things just aren\u2019t that bad yet.<\/p>\n

We seem to have forgotten that quantitative easing (QE) was at one point a potentially deadly monetary experiment \u2013 a desperate measure designed to prevent the complete collapse of civil society. Now every time the S&P 500<\/a> looks like losing a few points, or a bit of bad economic data comes out, it\u2019s a case of \u2018let\u2019s just whack a little more plutonium in the fuel tank\u2019.<\/p>\n

The US is certainly slowing down, there\u2019s no doubt about that. Fed officials cut their growth estimates for the US quite sharply: they reckon it will grow at between 1.9% and 2.4% this year, rather than 2.4% to 2.9%. And there are plenty of smart people who think that the US is already in recession and has been for a long time (although this uses a broader definition of recession than the usual \u2018two shrinking quarters in a row\u2019 notion).<\/p>\n

However, while growth concerns are real, the Fed<\/a> needs a more concrete panic phase to launch anything as drastic as QE3 – a more rebellious Greek vote, sparking a rush for liquidity and a sharp market plunge, might have done it. As it is, investors have gone from fearing the end of the world last week to being paralysed with indecision.<\/p>\n

They\u2019re too afraid to buy in case something nasty happens. And they\u2019re too afraid to be out of the market because if something nasty happens, they think that policymakers will flood the world with money.<\/p>\n

With No Sign of QE3 Investors Are Right To Be Nervous<\/h3>\n

<\/center><\/p>\n

As far as I can see, investors are right to feel indecisive. It\u2019s possible that the US economy<\/a> doesn\u2019t \u201cneed\u201d QE3, but Ben Bernanke will take any excuse he can get to err on the side of caution.<\/p>\n

And he\u2019ll probably get that excuse later in the year. The economy is slowing down right across the globe, not just in Europe and the US: China saw manufacturing sector activity shrink for the eighth month in a row in June.<\/p>\n

As a result, life is getting tougher for companies. The latest company to warn on profits is US consumer goods giant Procter & Gamble. Some of its woes are self-inflicted, but the wider picture is pretty grim too.<\/p>\n

As James Mackintosh notes in his FT<\/em> column, operating profits globally are \u2018now falling at an annual rate of 5%\u2019. That\u2019s similar to the sort of fall seen at the start of recessions in the 1990s and the 2000s.<\/p>\n

Combine all this with the potential for an ongoing, rolling panic in Europe, and Ben is bound to come up with a reason to provide more QE<\/a>.<\/p>\n

John Stepek<\/strong><\/p>\n

Contributing Editor, Money Morning<\/strong><\/p>\n

<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek (UK)<\/a><\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

The Problem With the Spanish Bailout<\/a>
\n2012-06-15 – Keith Fitz-Gerald <\/p>\n

Australian Housing – How to Avoid This Pauper’s Retirement Trap<\/a>
\n2012-06-14 – Kris Sayce <\/p>\n

Why Warren Buffett is Loading Up on Tungsten<\/a>
\n2012-06-13 – Don Miller<\/p>\n

China’s Economic Data Statistics: Just Add Salt<\/a>
\n2012-06-12 – Dr. Alex Cowie <\/p>\n

Why Graphite is One of the Few Places For Savvy Investors to Make Money<\/a>
\n2012-06-11 – Dr. Alex Cowie <\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nWhy More QE Is Coming <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au The outlook is gloomy for investors hanging on for the next QE. Investors are starting to realise that Sunday\u2019s Greek election result was about the worst outcome they could have ended up with. If Greece had out-and-out rejected austerity, we\u2019d have had some panic – but we might have had some progress too. … <\/p>\n

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