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Coming Down from the Sugar High that is QE3

“The election is a reaction to the stock market. If you see strength in the market, consumer sentiment and confidence among the voters is higher. If you see volatility, you are going to see investors take that out on the incumbent,” said Eric Vermulm, an InvestTech Research senior portfolio manager.

I’m not much of an economist, but it would seem to be a fairly safe assumption that the economy has a significant effect on Presidential elections.  After this Augusts’ jobs report showing continued anemic job growth and a stubbornly high unemployment rate, I, like many others, assumed that the economy would be the most substantial hurdle for the Obama campaign to overcome. 

But, After the Federal Reserve’s decision to launch the Quantitative Easing policy (QE3), where the central bank tries to lower borrowing costs by buying up debt, the economy may no longer be a black stain on his resume. 

QE3 is essentially where the Central Bank will spend 40 billion dollars a month buying financial assets from commercial banks and other private institutions with newly created money. This is meant to boost the economy and stock market so that it shows progress.  The central bank will continue this policy until it deems the economy has shown positive growth indicators. 

Joshua Zumbrun, financial journalist at Bloomberg, reported that “In its economic forecasts released today, policy makers said the job-market will improve more swiftly by 2014, with unemployment forecast to fall to 6.7 percent to 7.3 percent, compared with 7 percent to 7.7 percent in their June projections. In 2015, unemployment will fall to 6 percent to 6.8 percent.”

Immediate gains can already be seen in the stock market, with Dow Jones industrial average, S&P 500, and Nasdaq posting gains between 0.6% and 1%, and the European stocks jumping between 1.5% and 2%. 

These numbers show an obvious boost in the economic outlook of the United States. Lauren Fox of U.S. News put it best when she said, “The math is simple. If the stock market gains in the two months leading up to the presidential election, the incumbent party wins. If the market falls, the incumbent party loses.”

One can only hope that American voters can see that measures like Quantitative Easing do not improve fundamentals of the American economy such as employment, but in fact help stimulate additional debt for the US Government and forced risk taking by those holding financial assets.  These numbers are not the result of successful economic policies previously carried out by the Obama Administration, but rather a band-aid for a struggling economy. 

 


 

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