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.