Tags: Berlau | stagflation | QE | inflation

John Berlau to Moneynews: QE3 to Trigger Soaring Inflation, Unemployment

By Forrest Jones and Kathleen Walter   |   Wednesday, 03 Oct 2012 12:40 PM

The Federal Reserve’s third round of quantitative easing (QE) — bond purchases from banks that stimulate the economy — might backfire and send inflation rates soaring and unemployment rates along with them, a dreaded condition known as stagflation, said John Berlau, a senior fellow for finance and access to capital at the Competitive Enterprise Institute.

The Fed recently announced plans to buy $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve, a monetary policy tool known as QE.

The announcement marks the third time the Fed has rolled out QE measures to jolt the economy since the 2008 financial crisis, with the first round seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

QE aims to stimulate the economy by injecting the financial system full of liquidity via bond purchases that push down interest rates to encourage investing, job demand and stock market gains, with side effects including a weaker dollar and potentially mounting inflationary pressures.

Yet, few banks are originating mortgages these days, making this third round of QE difficult to pull off.

Furthermore, companies and households are reluctant to invest and expand due to new regulations such as the Dodd-Frank financial reform law and the Affordable Care Act, which contain tax hikes as well as new compliance measures.

“The fact is, so far, they can’t find $40 billion worth of mortgages to buy because the mortgage origination industry has just been shattered by Dodd-Frank, so it’s not even going to be able to achieve its task of stimulating,” Berlau told Newsmax.TV in an exclusive interview.

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“In the meantime, by creating uncertainty about the dollar, it will have the bad inflation effect at the same time it doesn’t bring back the economy.”

The Fed adheres to a dual mandate to control inflation and keep employment rates at optimal levels.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

Many have said the Fed’s QE policy reflects a desire at the Fed to prioritize creating jobs over keeping prices in check, meaning once more Americans are back to work, the Fed will worry about mopping up liquidity and controlling inflation.

However, current regulatory policies up the risk the Fed might see both unemployment and inflation rates soaring, or stagflation.

“The 1980s and 1990s show under [Presidents Ronald Reagan and Bill Clinton], you could have low inflation and high unemployment, and the late 1970s show that you could have stagflation of high unemployment and high inflation — what we might be going back to unfortunately with QE3 and our overkill with regulation,” Berlau said.

“Inflation can contribute to unemployment actually if it shakes investor confidence. The Weimar Republic had hyperinflation in Germany in the 1920s and it didn’t have super employment levels because it scared everybody off.”

Meanwhile, the government needs to ease up on regulations and let the private sector take the lead to spur recovery.

“We need to let the entrepreneurial sector work as it has for 200 years in America,” Berlau said.

“Repeal major portions of Obamacare, Dodd-Frank, Sarbanes-Oxley and other things just so entrepreneurs and investors can get together and build new businesses, build the Apples and Microsofts of tomorrow. Government isn’t going to come and create the jobs and businesses of tomorrow. It’s going to be the private sector, the next Steve Jobs.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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