Will there be QE3?

Will there be QE3?

If you understand what Quantitative Easing is you know the answer. As the Grateful Dead once sang: "I can tell the future: just look what's in your hand."

Quantitative Easing is a phrase that makes it sound as if a bunch of math wizards were sitting in a smoky room with slide rules and calculators performing a mystical calculus to tame the animal spirits of the economy.

Right now, it appears to every commentator and politician that whatever they've been doing, unfortunately hasn't worked. So they're all against it. "It" weakens the dollar. BAD. We all know we want a STRONG DOLLAR. "It" creates more debt. BAD. We all want LESS DEBT. "It" puts the Government in the markets. BAD. We all want free markets.

Let's let the markets work now! Free markets will heal themselves. Government out!

Okay. So what is "it?"

Do you know?

Quantitative Easing is when the Treasury - in order to finance our massive debt - issues Treasury Bonds - (yes more debt). And the Federal Reserve Bank of the United States prints money and gives it to the member banks so that they can buy this debt.

That's it.

What happens when it stops?

Well if lots of countries were all lined up to buy our debt - then nothing.

But unfortunately that is not the case. If nobody buys the debt our interest rates rise and the economy collapses. Because we can not afford to pay higher interest on our massive debt.

But that's not all. If the banks don't get money from the Fed to buy the debt, then the Banks have no money to put into the STOCK MARKET. Quantitative easing has been plowing money through the banks into the stock market. This creates a wealth effect. As stocks rise people who own stocks have more money and the economy appears to be doing well.

Get it? So when Quantitative Easing ends the Stock Market falls.

So guess what will happen? All those politicians and commentators will worry they will lose their jobs. Because when markets fall politicians get voted out. And when markets fall people stop watching Stock Market TV shows. So All those people who have been saying Quantitative Easing is BAD, will suddenly be demanding a new round of Quantitative Easing. Including the bankers who employ Ben Bernanke over at the Fed.

And guess what will happen?