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The Dark Side of QE

I don’t believe Quantitative Easing Part II will have a positive effect on the economy. It may have a positive effect on commodity prices if you think rising commodity prices is a positive. More likely, rising commodity prices will have this effect:

SAN FRANCISCO (MarketWatch) — Rising iron-ore prices and softer demand are weighing on steel companies, which warned Tuesday about the pace of the ongoing global economic recovery.

No. 1 steel maker ArcelorMittal /quotes/comstock/13*!mt/quotes/nls/mt (MT 32.31, -0.62, -1.88%) said its business performed at the “lower end” of its expectations for the third quarter. U.S. Steel Corp. /quotes/comstock/13*!x/quotes/nls/x (X 40.24, -0.61, -1.50%) reported a surprise loss, while AK Steel /quotes/comstock/13*!aks/quotes/nls/aks (AKS 12.32, -0.52, -4.06%) posted a larger-than-expected loss for its quarter.

Shares of all three companies fell Tuesday. In late morning trades, ArcelorMittal fell 5%, while U.S. Steel lost 4% and AK Steel dropped 5%.

Since July, steel companies have faced lower selling prices, declining shipments and weaker order rates due to a slowdown in construction projects. At the same time, raw material costs have gone up.

AK Steel said it will pay almost double the 2009 benchmark price for iron ore, the ingredient used to make steel products. U.S. Steel said its costs for iron ore were higher as were the costs for coal and coke used to fire its furnaces.

“A stubbornly reluctant economic recovery and soaring raw material costs will continue to challenge us in the near term,” AK Steel Chief Executive James Wainscott said in a statement.

And this:

NEW YORK (MarketWatch) — Kimberly-Clark Corp. /quotes/comstock/13*!kmb/quotes/nls/kmb (KMB 62.77, +0.16, +0.26%) said Tuesday its net income dropped to $469 million, or $1.14 a share, from $582 million, or $1.40 a share, in the year-ago period. Sales rose 1.3% to $5 billion. Wall Street analysts expected earnings of $1.29 a share and revenue of $5 billion, according to a survey by FactSet Research. The company said results declined, “primarily due to cost inflation of $265 million.” For 2010, the household products company expects adjusted earnings of $4.60 to $4.70 a share, compared to the Wall Street target of $4.73 a share.

The same people who think QE II will have a positive effect on the US economy are the same people who believe that a devalued dollar will cure our trade deficit. For some reason these people only consider one side of the equation. They think that if the dollar falls our exports will be cheaper and rising exports will cure the trade deficit. They forget that our imports will be more expensive and that means higher costs  and lower profits. The same is true of the people who think that higher commodity prices mean growth. They say that higher commodity prices means that demand is rising relative to supply, but they fail to question why demand is rising. If it is rising because investors are hoarding commodities to protect their purchasing power then it just means higher input costs for US companies and again lower profits as there is no increase in real end user demand and they can’t pass along the price increases.

Our economic problems will not be solved by manipulating the value of our money. The problems are real and the best monetary policy can do is provide an illusion of a solution.