How Low Can We Sink?

Bob Beauprez
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Posted: Sep 12, 2011 12:01 AM

It looked like another case of the left hand of government not knowing what the right is doing, and indeed that was the case.  The Fed is considering QE-3, Quantitative Easing, to drive interest rates lower at the same time that rates have already reached an all time historic low. 

According to the Washington Post, the Federal Reserve is contemplating another round of bond purchases "which should lead to lower interest rates." 

This would be the Fed's third try at Quantitative Easy – spending massive amounts of money created out of thin air, and hoping it stimulates the economy.  

OK; that's traditional Keynesian philosophy.  The theory being that lower rates get capital moving again in the languishing economy.  But, if lower interest rates are the magic elixir for our economic woes, it looks like the market already beat the Fed to the punch, and still the economy is stagnant.

The benchmark 10-year Treasury bond hit an all time record low yield of just 1.97% on Tuesday of this week; the first time ever it has fallen below 2 percent according to the USA Today report.  Mortgage rates parallel the Treasuries, and are likewise at historic lows with no one expecting significant change any time soon. 

If cheap money was the secret to getting the economy moving and if more government spending actually stimulated the economy, we should be roaring by now.  But, we're not.

With QE-1 and QE-2 the Fed likely poured over $2 trillion into the economy.  I say "likely" because no one really knows what the Fed does behind their curtain of secrecy, but we do know that positive results of all that spending are hard to identify. 

Surely someone hanging around Washington is wondering if there might be another reason why the economy is stuck in the mud other than interest rates.  

In the midst of a deep recession, Washington created an avalanche of new regulations, passed thousands of pages of new legislation, made unprecedented government intrusions into the private sector, and burdened every American with trillions of new debt.  

The economy thrives on predictability and certainty.  But, everything that the Obama Administration has done has created more uncertainty and anxiety. 

The Fed can continue to print money and drive down rates until the cows come home, but unless employers, consumers, and investors see a glimmer of future stability, the economy is likely to stay in a rut. 


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