So why does QE play such an important role for Obama going into an election? No president has ever been reelected to office when unemployment is above 8%, much less 9%. With the unemployed labor pool at very high levels, poor sales being the biggest concern for small business owners (according to the most recent NFIB survey) and wages failing to keep up with a rising cost of living there is no incremental demand on businesses to create new jobs. Since small businesses have 6 applicants for every 1 job opening, are are the primary creators of 70% of the jobs in the country, there is no pressure for wage increases. Without rising incremental demand from consumers, because 1 in 5 are underwater or delinquent on their mortgage, are unemployed or on food stamps, there is no reason for small business to expand production or manufacturing. While the Federal Reserve has been worried lately about commodity price inflation - the real threat to the economy is wage deflation as it bites into the basic economic cycle of a supply/demand economy.
However, it isn't just the unemployed that will kill Obama at the polls. Without another round of QE, and most likely soon, the economy will be headed for extremely low or potentially even negative growth. When round one of QE finished in the summer of 2010 the economy slid form 3.1% annualized growth to 1.7%. This shock to the system immediately launched the Fed into overdrive to start QE 2. Today we are heading into the summer with a 1.8% annualized growth rate, likely to be revised down a notch, and as QE 2 winds up entirely at the end of June we are likely to see a slide to below 1%. This will most likely get a very late night phone call placed to Mr. Bernanke from the Whitehouse as the average American votes psychological and emotionally.
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