Most analysts anticipated a rise in interest rates after QE1 ended. However, quite the opposite happened. In fact, interest rates dropped by almost 0.9 percent within the following five months.
On the other hand, the economy was still not moving. The FED continued to reinvest any payments they received on the securities purchased, in order to keep the money supply and velocity of money consistent. But it simply wasn’t enough to make everyone happy. After all, all markets must always go up, right?
On November 3rd the FED announced QE2. While promising to continue the status quo, they also began to purchase $600 billion in long-term Treasury securities. This would serve to push some of the debt out a little farther.
Now, remember, for you and I to invest in these vehicles carries a great deal of risk. We have to use our hard earned cash to invest. But for the FED, they don’t have to earn anything. All they have to do is push the right buttons and, voilà, the cash exists for them to distribute however they please. And by whatever percentage they increase the number of dollars, the value of your dollars decrease.
According to the FED QE2 would result in the economy recovering more quickly. Furthermore, mortgage rates were to either maintain current low levels, or even drop more.
What happened? The exact opposite. Mortgage rates actually spiked over half a percentage point in the first month. By the time QE2 ended, on June 30, 2011, mortgage rates had given back about 20 of those basis points, resulting in an increase of about 0.30 percent on mortgage rates.
So, then what happened? While most “experts” expected interest rates to rise at the end of QE2, again, the exact opposite happened. Over the next couple of months mortgage rates dropped almost 0.50 percent.
So far the conclusion is obvious. It seems apparent that QE efforts are effective in holding back the flood temporarily. It is equally apparent that QE does not accomplish the goals the FED sets before it. Expected lower interest rates do not materialize, but actually move in the opposite direction. Does this stimulate home buying?
Another word of caution here: There are signs in many parts of the country that real estate is, indeed, picking up. Some of this can be from a sort of equilibrating effect from the problems of 2008. However, some is from speculation and foreign investors as well. Also, there is evidence of serous shadow inventory. In other words, banks are not repossessing all the houses they could (should?) because they simply can’t deal with the inventory. And they know that if they do it’ll result in housing prices dropping even further.
The FED’s efforts to forestall the inevitable laws of economics will eventually fail, and do so epically. However, because they have built so much international dependence upon the dollar, it is impossible to know how long they can keep this up. For now, we must be aware of the dangers and prepare however we’re able. Read more about QE2 here.
For your prosperity,
J. Keith Johnson
The Gold Informant