"it is losing money elsewhere."
Sept. 26, 2012, 1:10 a.m. EDT
The emerging headache of QE3: Andy Xie
QE3 should prompt China to press ahead with economic reforms
By Andy Xie
BEIJING ( Caixin Online ) — The Fed has promised to purchase $40 billion worth of mortgage-backed securities (MBS) per month until it is satisfied with the economy. By all accounts an unemployment rate above 7% is not satisfactory to the Fed.
Its own analysis doesn’t expect the unemployment rate to fall below 7% in two years. That suggests that QE3 will last for over two years, and the total amount of MBS purchases will exceed $1 trillion, more than QE1’s $1 trillion.
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The United States’ household real estate value has declined by 30% from the peak in 2006. The current aggregate value of $16 trillion is slightly above 100% of gross domestic product and still high by historical standards.
If the market adjusts naturally, it may well fall another 30%. The Fed’s actions so far have decreased its decline. QE3 is likely to continue this support. However, the artificial support can’t reverse the trend. It merely allows the nominal GDP to grow while keeping housing value stable. It cushions the downturn, but also saps the recovery strength.
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The economy didn’t reach its natural bottom in the downturn. Therefore, the upturn is weak too.
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The Obama administration is filing a complaint against China at the WTO over autos and auto part subsidies. That action is obviously part of presidential election politics.
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The irony is that, while the Obama administration claims credit for saving General Motors, China actually did. GM sold 2.5 million vehicles in China in 2011. Moreover, these cars were sold at high prices. China probably has accounted for over 100% of GM’s profits over the past five years, i.e., it is losing money elsewhere.
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The Fed reassures us that, when inflation becomes a problem, it will take back the excess money to stop it. However, such an act would trigger a massive recession. The promise may not be credible, i.e., the Fed may accommodate it and let all the QE money become inflation. The binary nature of the QE eventuality is a huge uncertainty.
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The price of gold may go very high this time. QE3 is like a river. The flow may be small for any given day, but it adds up over time. As competing commodities cannot inflate due to weak demand and oversupply, the liquidity into gold could be far bigger than in QE1 and QE2.
Good article. Much more: http://www.marketwatch.com/story/the-emerging-headache-of-qe3-andy-xie-2012-09-26?dist=beforebell
Gold is $1,581/oz today. When it hits $2,000, it will be up 26.5%. Let's see how long that takes. - De 3/11/2013 - ANSWER: 7 Years, 5 Months
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