On September 13, 2012, Ben Bernanke announced
that the Fed will employ QE3 indefinitely until we see significant improvement
in the labor market. Well, what is QE3
exactly? QE3 literally means the third round of Quantitative Easing. QE is just a fancy way of saying that more
$$$ will be in circulation. Law of Supply
says that an increase in supply will result in a decrease in price. In this case, a decrease in the price of the
USD, aka depreciation.
So, the purpose of QE is to lower interest rates (increase
in currency supply also results in lower interest rates, again, Law of Supply). Lower interest rates will make it more
affordable for consumers to borrow money to spend money. Domestic consumer spending is a major
component of GDP- see equation below.
Y = C + I + G + (X-M), where:
Y = GDP
C = Consumption (aka consumer spending)
I = Investment
G = Government spending
X = Exports
M = Imports
In theory, increased spending boosts the economy (illustrated
by the above equation). In this case, the QE is tied to the labor and housing
markets. My concern is, is all of this
worth depreciating the Dollar, especially right now when the Euro is struggling…with
the added risk of inflation and higher prices of goods.
On the plus side, there will be additional liquidity in the
markets and a lower USD value should increase exports (since the Dollar is
cheaper, US products will be less expensive to the rest of the world), thus
increasing US GDP (also illustrated by the above equation). However, with globalization and the high
correlation of world markets, most of our trading partners will also be
experiencing a slowdown. So even with a
cheap Dollar, who’s buying?
