For those who are logic-minded, the current state of the world can, unfortunately, be seen as a function of Europe. The age of decoupling has ended, and the era of globalization has begun. The effect of the EU on the U.S. is quite obvious, and I will give two simple examples from just within the past couple weeks.
European Central Bank President Mario Draghi announced July 26 that the ECB is prepared to do whatever it takes. On this simple statement, the markets rallied with hopes of a faster recovery. The S&P 500 rallied an astonishing 3.59 percent July 25-27! If that doesn’t show the fear currently in the market, then I don’t know what does.
Draghi made another announcement Aug. 2 that revealed to the markets the daunting truth —that there is no real plan in place. This negative news shot the markets much lower, only increasing the volatility in the market from traders whose strategy was to “buy on the rumors and sell on the news.” So, what is my point, you may ask?
With the world pending a solid plan out of the EU, the U.S. is forced down an inevitable, ill-fated path. We must worry about our own economic strength and future growth; thus the Federal Reserve must stimulate our economy. Well, they don’t have to, but the indecisive, foolish and petty squabbles in Washington in preparation for the 2012 election are certainly not helping. All of these political games have trumped an agreement on a sustainable fiscal policy. The result is that the state of the U.S. economy has been put solely on the shoulders of the Federal Reserve.
Regardless of Federal Reserve Chairman Ben Bernanke’s recent announcement, which did not fulfill some analysts’ predictions of round 3 of quantitative easing, 48 percent of economists surveyed by Bloomberg News said that they expect a new round of asset purchases (mostly mortgage-backed securities) to be announced at the Fed’s Sept. 12-13 meeting. We have already gone through QE1 and QE2 as well as a prolonged operation TWIST, which have given us a slow, modest recovery.
Asset-purchasing programs will have diminishing returns on the market. With the current state of the U.S. economy and no plan from the EU, the Fed committee doesn’t really have any choice other than not to announce QE3 in September. Therefore, I would love to see them publish a comprehensive cost-benefit analysis for additional quantitative easing.
It seems we are shooting ourselves in the foot either way, and as of now I see no real end to this predicament.
Douglas Hammond is an economics major of the class of 2014 and can be reached at email@example.com.