Quantitative Easing Is Not the Answer

Let me start out by saying that if you came to this article in search of a mad rant about "Helicopter Ben" or fiat currency, then you'll be sorely disappointed. I believe an independent Federal Reserve is a force for good and that a flexible money supply has helped us achieve an unprecedented standard of living. With respect to the past few years, moreover, the hypothetical threat of inflation is significantly more palatable than the scourge of deflation.

Yet I nevertheless believe that unleashing another round of quantitative easing, as the Fed appears inclined to do, would be a mistake and amount to an unnecessary expenditure of the central bank's goodwill. Although I know this will fall on deaf ears given the political season, it's now Congress' turn to reassume the mantle and do its part to spur the economy.

The Fed can't fix our problems
The problem with the economy is that there's an absence of aggregate demand. Read any number of second-quarter earnings releases and this will become obvious. Companies as disparate as Intel (Nasdaq: INTC  ) , Chipotle (NYSE: CMG  ) , FedEx (NYSE: FDX  ) , and Kraft Foods (Nasdaq: KFT  ) have all downgraded their forward earnings guidance in recent days. According to Intel's press release (emphasis added): "third-quarter revenue is expected to be below the company's previous outlook as a result of weaker than expected demand in a challenging macroeconomic environment."

What's behind the absence in demand? Jobs, or rather a lack thereof. A mere 96,000 jobs were created in August, well below the level necessary to keep up with population growth. And while the unemployment rate declined from 8.3% to the still unacceptably high 8.1%, the move was caused by people who dropped out of the labor force and notably not by a relative uptick in employment. According to The Wall Street Journal, men are now seeing the lowest labor-force participation rate in history.

What's this have to do with Congress? It turns out, everything. A day before the official government figures were released last week, Automatic Data Processing, a private payroll-processing firm, estimated that the domestic private sector had added 201,000 jobs during the same time period. This suggests that the private sector is adding jobs while the public sector is shedding them. Justin Lahart of The Wall Street Journal noted the same phenomenon a few months back: "If there were as many people working in government now as there were in December 2008, the unemployment rate in April would have been 7.1%, not 8.1%." Taking this one step further, moreover, my colleague Morgan Housel estimated that if the government had grown at the same rate from 2009 to 2012 as it did from 2005 to 2008, then the unemployment rate would have been only 6.5%!

By now it's probably obvious why a solution to our woes is outside the Federal Reserve's institutional competence. While injecting more liquidity into the system may be good for equity markets, evidenced by the recent performance of the Dow Jones Industrial Average (INDEX: ^DJI  ) , it has no bearing on the personnel decisions of the federal and state governments. The ability to influence these numbers lies with Congress, which controls the national purse strings and thus the discretion to expand or contract the public labor force.

Congress won't fix our problems
The thought that Congress would put petty partisanship aside and address the unemployment issue is laughable at best and dangerous at worst. Indeed, in a rare display of bipartisanship earlier this year, the net result of their combined efforts was the redundantly titled Jumpstart Our Business Startups Act, or JOBS Act, a patently asymmetric transfer of power from individual investors like you and me to investment banks, hedge funds, and venture-capital firms.

So where does this leave us? Your guess is as good as mine, though I'm not overly optimistic that anything will be solved before the next election. And it's for this reason that I suggest all investors read our free report on stocks that could skyrocket after the presidential election, which outlines unique ways you can profit from the outcome, irrespective of the winner. Download this free report instantly.

Fool contributor John Maxfield has no financial stake in any of the companies mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Intel. Motley Fool newsletter services have recommended buying shares of FedEx, Intel, and Chipotle Mexican Grill. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 11, 2012, at 6:01 PM, FoolinSD wrote:

    Hmmm the odds of me investing in a small business IPO has decreased from slim to ZERO. Thanks JOBS Act

  • Report this Comment On September 11, 2012, at 7:55 PM, neamakri wrote:

    QE gives money to bankers and stock brokers. The FED is not responsible for the creation of jobs. Who said it was? The FED has no authority to let contracts to build infrastructure, or buy airplanes, or purchase anything else from the private sector. Anyone who thinks the FED is reponsible to create a single job is dreaming in some kind of fantasy world. That includes Bernanke.

    The supreme court can't do it.

    What about the president? I suppose he could hire 50,000 new secret service agents, or order military leaders to hire more troops, but that's about it.

    That leaves congress to make the jobs. So far they have made a pitiful case. I can only hope that future students of government can learn from the failures of this congress.

    (by the way, that includes congress letting the banks do anything they want!)

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