View: Will Ben Bernanke's QE3 Work? No, It's Already Failed - Forbes

WASHINGTON, DC - SEPTEMBER 13: Chairman of Federal Reserve Board Ben Bernanke speaks during a news conference. The Federal Reserve announced it will purchase additional agency mortgage-backed securities at a pace of $40 billion per month to support a stronger economic recovery. (Image credit: Getty Images via @daylife)

People can stop wondering if QE3, Fed Chairman Ben Bernanke’s latest effort to “do more”, will work.  It has already failed.

The futility of QE3 was made clear by the financial markets’ reaction to the Fed’s announcement.  The Real Dow, which is the Dow Jones Industrial Average divided by the price of gold, actually fell by 0.65% on September 13, the day that QE3 was announced.  While the Dow gained 1.6% on the day, gold went up by 2.2%.  In real terms, QE3 made the economic outlook worse, not better.

The historical record is clear.  Prosperity (including strong growth in real GDP, total employment, and real wages) occurs only during periods when the Real Dow is rising.

The Real Dow rose during the 1950s and 1960s, plunged during the 1970s, soared during the 1980s and 1990s, and plunged again in the 2000s.  It has fallen even further recently, including by 16.0% since the start of President Obama’s so-called “economic recovery”.

The fact that good times are always accompanied by a rising Real Dow is no coincidence.  Prosperity results from rising real capital employed per capita and per worker.  The Real Dow is a measure of the relative attractiveness of investing in productive, “risk” assets vs. capital-preserving “safe” assets.

Given that the Real Dow has declined by 81.0% since August 2000, it is not surprising that the past 12 years have seen the worst economic performance since the Great Depression.

On September 18, 2012, the Real Dow stood at 7.65, the same level as it was in August 1951.  This means that the disastrous Bush–Obama–Greenspan–Bernanke economic policies have wiped out the real value of 61 years of work, saving, and investing on the part of the American people.

But wait, there’s more.

One of the goals of QE3 is to reduce long-term interest rates.  In its press release, the Fed said, “…These actions…should put downward pressure on longer-term interest rates…”

This didn’t happen.  On September 7, the Friday before QE3 was announced, the market interest rate on 10-year Treasuries was 1.67%.  On September 14, the Friday after the QE3 announcement, it stood at 1.88%.

Even worse was the increase in market inflationary expectations that the QE3 announcement caused.  The yield spread between 10-year Treasuries and 10-year TIPS, which can be viewed as the expected inflation rate over the next 10 years, widened by 9 basis points on September 13, to 2.47%.  It increased even further, to 2.64% on Friday, September 14.

The inflation rate currently implied by the bond market is far higher than the Fed’s announced target of 2.0%.  And yet, in the Fed’s QE3 press release, they said, “The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.”

But wait—it gets still worse.

On Friday, September 14, the interest rate on 10-year TIPS closed at -0.76%.  This is the lowest number ever seen.  The 10-year TIPS interest rate first went negative on August 10, 2011, and it has been continuously negative since January 24, 2012.

A negative real interest rate implies an economy that is being liquidated.  If investments promising positive real returns were available on the margin, investors would not hand their money over to the federal government for the next ten years for a promised real return of -0.76%.