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The Fed's all but certain decision to roll out a second round of quantitative easing, the so-called QE2, is evidence of their lack of confidence in the economy's ability to sustain a healthy rate of growth organically. Since the impact of all the various stimulus programs peaked with a 5% GDP in the 4th quarter of 2009, the rate of growth has dropped dramatically from 3.7% in the 1st quarter of 2010 to 1.7% in the 2nd quarter, down to 1.2% in the 3rd quarter. This anemic, sub-par rate of growth will not spark much in the area of job creation and with the current round of unemployment benefits ending in November; the new Congress will be facing another decision on extending them. It should give the Fed serious pause that after several years of close to zero interest rates, the stimulus plan, the TARP program, Fed purchases of both Treasuries and mortgages, targeted real estate tax credit programs, cash for clunkers and mortgage modifications, nothing seems to be working. What more can be done that has not already been tried? The unvarnished truth may very well be that the Fed's manipulation of monetary policy will not result in forcing businesses and consumers to take on debt they do not want or currently need. In fact businesses and consumers are behaving rationally in response to having taken on too much debt in the past and are simply purging themselves of it, essentially going on a "debt diet", in this agonizing deleveraging process. The Fed's continued attempts to tinker and tweak may reflect a fear of stepping back and actually allowing the free market to work. It remains to be seen whether debasing the dollar in an effort to increase U.S. exports, sparking a global currency war in the process, will work either.
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