QE3

QE3 or quantitative easing 3 is the latest hot topic that everyone is talking about especially after the gloomy outlook in the labour market in US as only 54,000 jobs were created last month compared to the projected number of 150,000. As a result, fear of recession come back and they (as usual) look at government to provide "free lunch".

So, til today, we have TARP or troubled assets Relief Program which worth US$ 700 billion and QE2 which worth 600 billion. These however do not include the trillions and trillions of US dollar "printed" by FEDS and created by commercial banks.

Federal Funds rate on the other hand has been keep at record low of 0-0.25% since December 2008. So, technically, money is free in US as the price and cost of money (interest rate) is zero. This situation is dangerously similar to Japan in the 1980's after the burst of real estate bubble. As a result, Japan has been in a liquidity trap for over 2 decades and still recovering.

US is dangerously close to either have hyperinflation, liquidity trap, or worse, both, depend on the sentiment of consumers. Another round of QE will almost guarantee liquidity trap as consumers and investors will not be stimulated by the easing of monetary policy. Zero interest rate policy implemented by the Feds certainly does not make the situation any better.

On the other hand, although consumer do not invest as illustrate by liquidity trap, they may spend more as more easy money come in. Unexpected increase in consumption may lead to inflation or even hyperinflation.

Either way US economy is looking gloomy now and QE3 will only end with a massive failure. It's crazy to expect different results with same method. So if TARP and QE2 did not work, how can QE3 work?