Federal Reserve Chairman Ben Bernanke really means it this time.
He will rescue the economy.
But we've all heard the definition of insanity: doing the same thing over and over and expecting a different result.
Why should we think QE-3 will work when the previous two failed? (Don't think they failed? Then ask yourself why we need a third one.)
Granted, this round of quantitative easing appears open-ended. And it includes a pledge to purchase $40 billion a month in mortgage-backed securities. But high interest rates don't explain the sluggish residential real estate market. Home purchases are slow for the same reason that many business owners haven't expanded. A Sept. 12 CNNMoney article quotes a former Fed economist:
When the August jobless rate fell to 8.1%, the widely reported reason was because so many people gave up looking for work. U.S. business startups are at record lows. Food stamp rolls recently skyrocketed. Several U.S. municipalities are declaring bankruptcy. Ratings service Moody's just warned of a possible U.S. downgrade. And the national debt just surpassed $16 trillion.
Monetary policy will not fix what ails the economy. Robert Prechter explains:
Few people foresee a major economic reversal just ahead. The fact that Fed policy has become "QE Infinity" (it already has a nickname) tells us that something is badly wrong with the economy. And that something is a massive credit bubble.
Monetary policy cannot make the global credit bubble simply vanish. Only a deflationary crash can do that. The chart below reveals why.
Look how fast the debt deflation unfolded in 1929-1932.
Learn what EWI expects regarding today's much bigger credit bubble.
See more charts and read insightful commentary that will help you position yourself now for what's to come next.
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This article was syndicated by Elliott Wave International and was originally published under the headline Bernanke's Bigger Bubble: QE-3 and the Coming Economic Crash. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.