QE Is Not Likely To End in 2013


There have been many hints over the last several months (3)(4) that the Quantitative Easing (QE) program may end in 2013. There have been repeated statements by Ben Bernanke that QE will end when the labour market substantially improves. (1) Yes, this statement can change at any time, but there are a number of reasons why QE will not end any time soon, in spite of what people are saying.

The first reason is the U.S. payroll tax. Since that has been enacted, the number of jobs has been declining (5). When people’s wages are reduced, they spend less. You can’t spend what you don’t have, especially when there is no more credit available, and no hope of a future job.

The second reason is President Obama’s latest budget. There are cuts to Medicaid and Social Security being contemplated. If no cuts arrive in this budget, there would be a sequester instead – which has the same effect.(2) If cuts occur anywhere, money would be taken away from people, and they would be forced to spend more on basic needs. The job market would suffer. These effects would come through in the next 3 to 6 months, and the employment numbers will get worse.

The third reason is that the participation rate is at a multiple year low. (1) This means that even if many new jobs are created, the influx of new job seekers will drive up the unemployment rate, making that number look a lot worse. More job seekers also create the semblance of more competition, which will drive down wages and benefits. There is simply a large pool of unemployed people, and until that pool is used up, the present malaise will continue and the job market will languish.

Unless Ben Bernanke changes his mind or his policy using the labour market as an indicator to end the QE program – it will likely go on much longer than expected. The longer it goes on, the longer the higher interest accumulated on the debt will necessitate further spending cuts, and the cycle continues. How much faith do you have in QE ending in 2013?

Sources:

1)      http://www.bloomberg.com/news/2013-04-05/bernake-s-caution-on-jobs-vindicated-by-payrolls-slump.html

2)      http://www.keyt.com/news/politics/Obama-to-reach-out-to-Republicans-in-budget/-/17989322/19630988/-/2kjh0f/-/index.html

3)      http://www.bloomberg.com/news/2013-02-27/fed-s-fisher-calls-for-cuttting-qe-to-avoid-overkill-.html

4)      http://www.cnbc.com/id/100352475

5)      http://www.bls.gov/news.release/empsit.t10.htm

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About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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