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Quantitative easing on the way?

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Jacquelyn Martin / AP

(Read caption) A statue of former Treasury Secretary Albert Gallatin stands guard outside the Treasury Building in Washington, Monday, Aug. 8, 2011, as stocks slid Monday amid a rout in global stocks after Standard & Poor’s downgraded the US credit rating. How likely is another round of quantitative easing from the Federal Reserve?

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After the recent market rout, more and more people speculate that the Fed may launch QE3.

Given that the significant increase in risk aversion and money demand has undone some of the price inflation previously created by QE2, QE3 is certainly a possibility.

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QE2 did cause an increase in money supply and [therefore] increase commodity prices, stock prices, consumer price inflation and corporate profits. However it also reduced real wages and total real economic growth was actually significantly lower in the three quarters after it than in the three quarters before it. There is little reason to believe that QE3 would be more succesful in increasing real economic growth.

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