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QE3 May Have the Following Side Effects

robin anderson

Imagine you’ve just finished dinner. You sit down to watch one of the various season premieres that will be populating the airwaves. During one of the program breaks, you see a strange commercial showing young people running, old people laughing, and children hugging their parents. It’s got to be one of those commercials for some new prescription medication you think…but no. This is an ad for the Federal Reserve’s new monetary policy tool, QE3. Wondering if you’re dreaming, you think, what channel is this?

If you don’t skip over commercials, this is what you might hear.

ANNOUNCER (in a calm, relaxing tone): If a sluggish economy is keeping you awake at night, and lowering the federal funds rate just hasn’t worked, QE3 is here to help. And if you suffer from the discomfort of chronic, persistent unemployment, QE3 is here to help.

QE3 is a unique blend of open-ended bond purchases designed to bring down stubborn long-term interest rates. QE3 was designed by your central banker to reduce uncertainty by demonstrating his inflation expectations and his commitment to keeping rates low for an extended period. QE3 is best used in conjunction with Operation Twist.

QE3 may lead to improved business and household confidence. And the best part about QE3 is that you keep taking it until everything’s better.

At the bottom of the screen, you see the words “Results may vary. “ Ok, you think, this is like one of those prescription drug commercials – now they’ll start talking about the side effects.

ANNOUNCER (quicker pace, and slightly more serious): QE3 is designed for those who’ve built up a resistance to QE1 and QE2. QE3 is not a cure for policy uncertainty. Prolonged use of QE3 may cause unanticipated and hard-to-control inflation. Call your central banker if you experience sudden and sometimes serious commodity price increases or asset price bubbles. When used in conjunction with near-zero interest rates, QE3 has been known to exacerbate problems for pension plans, insurance companies, and other long-term savers. Side effects may include equity market rallies, resistance to further monetary stimulus, and higher gas prices. QE3 can be habit forming. Economies without liquidity problems should not depend on QE3.QE3 has not been tested in a laboratory environment. All the potential effects of QE3 may be hard to quantify.

The weird commercial fades back into a program that’ll probably get cancelled before Thanksgiving, and if you’re like me, you find yourself wondering about this QE3. If the Federal Reserve can alter people’s expectations on interest rates and inflation, then QE3 has a good chance of being effective. Longer term, they’ll need to stay nimble to combat inflation. But in my opinion, for now, the benefits to the economy now probably outweigh the potential hazards. So, until then, maybe these pharmacy companies will come up with a prescription medication that will help us to not worry so much about the economy.

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