WHOA — here comes QE3

There’s been a lot of talk on QE3 and not a lot of action. At least not in what was reflected in the net expansion of the monetary base.

That has changed quite dramatically. Check out the short-term monetary base at the Fed now:

That is a very notable change, because last year the Fed’s policy was actually deflationary. For the first time since the end of QE2, we are seeing Bernanke and the gang really firing up the presses, without a corresponding sell-off in other assets.

The Fed is expected to add about $1 trillion dollars to the economy this year. It is unlikely to cause a surge in monetary prices. It will help bolster the price of US debt and mortgage-backed securities. But as with previous QE’s, I expect commercial banks to stockpile this newly created money in their excess reserves.

This will not help the economy — it will merely sustain the grossly distorted world economic system a little bit longer.