The US Federal Reserve (FED) has stopped Quantitative Easing (QE). Japan and the Eurozone have started QE. Buying of various securities, Bonds and Stocks, around the world will be continuing, although which stock and bond markets are manipulated higher will change.
The Japanese stock market took off almost 5% on the news, and debt throughout Europe now carries lower interest rates. This applies even to Spain and Greece, countries on the brink of default.
US stock markets continued their move higher (up over 1% on Halloween) in sympathy. Of course, the FED will continue to buy Treasuries, although only short maturities.
The net result is that the Dollar has soared while the rest of the world’s paper currencies have become cheaper. US consumers will be helped as imported goods become cheaper, in Dollar terms. US manufacturers will be restrained from raising prices (or even forced to lower them), so again US consumers will benefit.
However, US companies profits will suffer, first as pricing pressure continues to be a drag, and second as profits from oversea subsidiaries gets translated into few Dollars. Lower company earnings will mean that PE ratios, already near bubble high levels, will go even higher. And, lower profits – or outright company losses – will mean more layoffs and higher unemployment, regardless of how the official numbers get massaged.
Those PE Ratios already are unsustainably high, and the higher they go means the sooner the stock markets will fall – possibly crash. 100 year average PEs are around 14, and falling markets rarely stop at average, so we could get back down to the 7 area. Are you ready for a market tumble from PE 28 to PE 7 – a 75% plunge?
So, what should the US government do? Should it ramp up money printing by the FED? Isn’t that what has pushed the US stock markets in PE 28 bubble territory in the fist place?
Should the FED just continue to keep interest rates near zero? Isn’t that what caused the housing bubble? Or, encouraged individuals, businesses, and our government to borrow beyond their means of repaying the debt? Or, penalized those who would dare think of saving money or depend on earnings on their life savings to live in retirement? Isn’t that what has reduced the Dollar’s Purchasing Power (in CPI lowball terms) by around 95+% since the FED was created 100 years ago?
Should Uncle Sam boost spending yet again to grease the wheels of commerce, Budget Deficit and National Debt be damned? Isn’t that what has crowded out the private, productive sector of the Economy?
The answer to all these Keynesian prescriptions is NO!
Government programs don’t produce anything. Government spending on balance reduces our Standard of Living. Money printing just debases the value of the paper currency we have saved and hollows out the Capital Base that we all depend on to maintain and grow the US Standard of Living. Zero interest rates encourage borrowing beyond the means to repay the debt and discourage the savings which grow our Capital Base.
We can’t take back the bad stuff which already has happened because of stupid government policies. But, we can get rid of those policies while we suffer through the unwinding of all the previous malinvestment caused by those stupid policies.
I already have laid out these Action Items, but they bear repeating:
Action Item: Roll back past stupid government policies.
- Amend the Constitution to require a Balanced Budget
- Amend the Constitution to set a Dollar limit on federal spending
- Phase out the various Entitlement programs to deal with the Unfunded Liabilities / Actuarial Deficit
- Abolish the FED and allow interest rates to rise on a definite, gradual basis up to whatever the Free Market rate should be