In this morning’s research note David Rosenberg makes the case for a QE3.  He writes:


Keep in mind that the Fed, unlike the ECB, has a dual mandate – and the one pertaining to the goal of full employment is becoming even more elusive.  The unemployment rate has already gone from 8.8% three months ago to 9.2% as of June and that is now well outside the year-end FOMC central-tendency projection band of 8.6 to 8.9%.  The Fed believes it will be down to 7.8% – 8.2% by the end of 2012.  Good luck.

The economy is going to need a lot more help to get to these numbers – not to mention the 3.2% consensus GDP growth forecast for the second half of the year.  It looks like the majority of economists are in for another big surprise as they were heading into 2008 where visions of soft-landings filled the air.

Keep in mind that every recession was ushered in by a rise in the unemployment rate of 0.5 percentage points or more.  We have no gone up 0.4 of a percentage point.  Just another 10 bps to go before the sufficient condition kicks in.”

The logical conclusion is that most market participants still think the Fed has to implement a QE3 in order to “boost” the economy.  I am nearly dumbfounded at these conclusions.  As QE2 ended it became abundantly clear that the program did little to nothing for the real economy.  In fact, the only real impact appears to have been a margin squeeze on the entire economy as it boosted cost push inflation and caused no increase in aggregate demand.  The end result was real GDP that peaked as soon as QE2 began.  Stare deep into this chart for the only evidence you really need:


QE2 did not do what it was expected to do.  It arguably made things worse.  The logic behind a QE3 simply doesn’t exist…..So, the more important question is not “how can there not be a QE3″, but rather “how can the Fed possibly justify a QE3?”


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Brian Ripley

    Re: Qe2 did not work.

    Geitner interviewed on Meet the Press:

    Meet the Press: “Did you guys get it wrong?”

    Geitner replies: “We can’t engineer a recovery.”

  • VRB II

    Rosie is one smart guy. But he’s not infallible. Having read Rosie for 4 years every morning you get a first hand look at the disease of “confirmation bias”.

    Rosie will take the 50 articles in each publication of WSJ, F.T, bloomberg etc. and cherry pick the most bearish articles to support Rosies day before bearish position supported by the day befores articles. Before you know it the markets up 102%.

    Anyone who knows me knows I like Rosie. He has alot of good items on the menu but there are some things you should avoid.

    Once again….WEll SAID Sir Cullen Roche( I just knighted you )

  • http://pragmaticcapitalism raddadd

    High unemployment+election year=Government spending.

  • Different Chris

    Someone needs to tell Geithnery the Gov’t could try to help the economy manufacture its own recovery by avoiding austerity and cutting taxes, especially to the middle class….

    Geithner scares me.

  • http://pragmaticcapitalism raddadd

    I like that thought.

  • haris07

    It will come…but not as soon as folks expect. Possibly by end of this year. Whether it does anything to the economy or not is all a moto point, Bernanke thinks it does and therefore he will do it. The only way he won’t is if the $ or Treasuries rebel furiously, but clearly they aren’t/won’t. QE3 is definitely coming.

  • prescient11

    QE3 lite is already occurring. I assure you something will be done on a fiscal or monetary level.

    That is, unless Obama’s real plan is to beggar all of us and thus make us dependent on food stamps and have to vote for him in ’12.

    But I put that at only a 25% chance.

  • MMTer

    Just what we need. We need to gun the commodity and equity markets even more so that when they collapse (after realizing that QE has done nothing positive for the economy) we can have an even bigger economic catastrophe.

    These guys seriously need to read Cullen’s disequilibrium paper. Distorting real wealth and nominal wealth is dangerous and ignorant.

  • VRB II

    MMTer….”We need to gun the commodity and equity markets even more so that…”

    I like that. Well said!

  • Leverage

    The only acceptable form of QE is the treasury one style (jumbo coins). QE’s for propping up equities and commodities are pointless and even counter-productive for the reasons CR says.

    All this crazy talk of injecting trillions of liquidity and moving the markets towards equities while the stupid debate over debt ceiling continues and ‘expansionary austerity’ hysteria and crazy talk continues.

    World upside-down, I can tell you that!

  • EB

    Cullen, WTF is going to happen now? Are we stable at the present level of consumption? Do you have any concerns over our massively bankrupt entitlement programs such as Social Security and Medicare? I mean, we can’t continue to run the country at the present deficit and that present deficit doesn’t even include the shortfall in the promises we have made retired people. I’m a little at a loss as to what to do.

  • boatman

    rosie’s correct….as things continue to go in the dumpster ‘they’ will have to do the only thing they can withold getting a bill going thru congress.

    whether #2 worked or not is irrelevant because its QE3 or just watch floating things circling the commode.

  • Patrick

    The fact that QE2 may not have worked is irrelevant. Thinking that it may have is all that counts. That is why if the marketplace demands QE3,4,5 etc it will be provided here and around the world.

  • alex p

    Marc Faber is 100% right. Here comes QE 3, 4, 5, 6 etc. If rates rise on our debt obligations it’s game over. The Fed will and can not allow rates to rise. Whether they peg the 10 year, the 2 year the 5 year or all three, they must keep rates low or we are bankrupt. Multiply the 1981 rates time our total debt. Do the math.

    Congess and the president are powerless under our democracy. We will go belly up through a currency crises. I will bet on Marc Faber and Felix Zulauf. You bet on anyone else and you lose. BIGTIME.

  • Ruschem

    Once again, as Rosie was right about the interest rates and deflation for 2+ years now, he will be right about the QE3 or some sort of big stimulus. It doesn’t matter whether we need QE3 or not. What matters is that the situation is getting worse and the politicians and Fed will not seat and watch it deteriorating much further. Too much is at stake. It doesn’t matter whether it helps or not, they – our saviors – will always claim that if they didn’t act, the situation would’ve been even worse.

  • JWG

    QE2 seems to have made things worse, if we decide that it played a role in boosting commodity inflation. Interest rates are at rock bottom and negative in real terms. What the Fed needs to do is a pure helicopter drop, but it doesn’t have the transmission mechanism. Congress can perform a helicopter drop in the form of a second, and juicier, payroll tax cut, but Obama will have to ask for it; the Republicans won’t volunteer it. Where to get the debt ceiling room for this big tax cut? Ron Paul has the answer: “destruction”(forgiveness) of the intragovernmental debt journal entry otherwise fatuously known as the “Social Security Trust Fund”.

    Paul Krugman’s and Nancy Pelosi’s heads would explode as cherished New Deal mythologies went up in smoke. AARP, oddly silent on the first payroll tax cut, would lose its mind. Although it might very well defibrillate and revive the economy, and help us all, it will never happen.

  • Strass Khan

    We did not see it coming. Anyway if it came, it comes.

  • Pod

    I think Rosie is saying that because of its “dual mandate” the Fed (Bernanke) feels it must “do something” in light of the employment situation. The only thing the Fed can “do” is more QE, right or wrong. It’s as though the situation calls for a hammer but the only tool the Fed has is a screwdriver.

  • CP

    “the only real impact appears to have been a margin squeeze on the entire economy as it boosted cost push inflation and caused no increase in aggregate demand.”

    You say that Japan’s biggest problem was deflation, yet you see no value in the Fed’s actions aimed at avoiding deflation. That’s not consistent. How do you reconcile your two positions?

    You say that QE caused no increase in aggregate demand, yet AD clearly increased. How do you know that this increase was not due to QE? How do you know what AD would have been without QE?

    Your position appears to be that, in the absence of any fiscal stimulus, the Fed should also do nothing. Is that correct? If not, what should the Fed do, given the absence of fiscal stimulus (apart from call for fiscal stimulus – which Bernanke has already done)?

  • El Viejo

    Same post on zerohedge here:

    The amazing thing to me at zerohedge is that the blogging is coming around to the majority point of view on this site.(about QE doing very little) Coincidentally, there seems to be a decline in the silver mongers at zerohedge lately. The thing to think about is that the market reacts strongly when fiction meets truth.

  • The Guy in Novi

    Uncle Ben was buying $100 B of USTs monthly. No more? They may not call it QE3 but it will happen and it has nothing to do with employment or the economy. It’s all about avoiding a default.

  • ken

    there must be QE3, 4 etc. to keep the ponzi scheme fromo collapsing as long as possible

  • Wes

    You use the phrase “boosted cost push inflation” and you have referred to “asset inflation” numerous times in previous articles.

    My understanding of inflation is too much money in circulation for the available productive capacity. An unusual concentration of investment money in hard assets results in higher prices for these assets, but no inflation.

    The obvious problem in the US is too little money in circulation for available capacity. I think you do a disservice when you say inflation of any type exists.

    I wish you would write an article explaining this point.

  • George H

    The problem is not most market participants still think the Fed has to implement a QE3 in order to “boost” the economy. The problem is the Fed thinks that way.

    Besides, the Fed will never be wrong. You see, if QE2 has not worked, it is not QE2’s problem. Let us try QE3. If QE3 will fail, it won’t be its problem. Let us try QE4. Something will work.

  • Fabian Hug

    Rosenberg was bearish since March 2009 and became bullish this month of May. He was one of those who said QE will not work. Now that he is long he would like to have more.

  • baychev

    As some commenters pointed already, QE2 is passe already and the only thing that matters is the bernank thinks QE#Next will work. probably he gets it just right that it works only in the commodity/equities space and nowhere else but he does not have the spine to say he is helpless.
    i think japanese style lost decade is more desireable than a run on the treasury and collapse of the dollar and the economies of the countries running substantial trade surpluses against the U.S. let’s all drown in debt and work till death.

  • Mercator

    Is it just me, or have we evolved to waiting for our government to make a move, so we can invest or divest. Fundamentals don’t matter, fighting the Fed does. It seems like they’ve won. They don’t serve the people anymore, they lead them. Am I wrong?