Chill Out on QE3, but Beware Debt Default: Sonders

Chill Out on QE3, but Beware Debt Default: Sonders

(Reuters) – The economy does not need a third round of stimulus but could convulse if lawmakers fail to raise the nation’s debt ceiling, the chief investment strategist at the largest U.S. discount brokerage operator said on Wednesday.

Liz Ann Sonders

Liz Ann Sonders, chief investment strategist at the brokerage unit of Charles Schwab Corp (SCHW.N), said a recent downdraft in stock prices in part arises from fears about the economy and government efforts to keep it growing.

Financial markets are bracing for the end this month of the Federal Reserve’s second round of quantitative easing, known as QE2, in which the central bank is buying as much as $600 billion of bonds to spur the economy.

Many investors say QE2 has boosted stock prices since late last year. But they also say the stimulus has driven commodity prices higher and depressed the dollar, and fear a third round of stimulus, QE3, might be needed for an economy that grew at just a 1.8 percent annual rate from January to March.

Sonders, however, called QE3 a bad idea, despite dampened investor sentiment that has fed a 6 percent drop in the S&P 500 index .SPX since the end of April.

“One of the biggest contributing factors to the confidence gap that we have now, not just by investors but by consumers, by businesses, is concerns about QE2 and excess stimulus and uncharted territory,” Sonders said at the Reuters 2011 Investment Outlook Summit. “It’s high time that we just chill for a little bit and let the economy move on its own.”

Sonders said it is premature to say how close the economy is to retreating into recession, two years after it emerged from a downturn that encompassed the 2008 financial crisis.

A spike in commodity prices tied to a falling dollar or Middle East unrest “would throw a real wrinkle to this being just a soft patch and not something worse,” she said.


But one risk is the ability of the White House and Congress to agree how to reduce the nation’s $1.4 trillion annual budget deficit, as part of an agreement to raise the country’s $14.3 trillion borrowing limit by August 2.

Failure to raise the limit could lead the United States, which has triple-A credit ratings, into at least a technical default on some of its debt.

“Both sides are going to the outer reaches of extremes and digging their heels in,” Sonders said. “There is a very, very tiny risk of default. But as is the nature of Washington, if we do get an agreement, it will be in the 11th or 12th hour.”

Raising the debt limit has long been a political football, with Democrats and Republicans disagreeing on how to redistribute the tax burden or otherwise reduce or reallocate spending.

A Reuters/Ipsos poll released on Wednesday finds Americans divided on how to reduce the deficit. Republicans preferred spending cuts to tax hikes by a roughly 4-to-1 margin, and Democrats slightly preferred tax hikes to spending cuts. Independents emphasized spending cuts by a roughly 2-to-1 margin.

Even with the looming 2012 election, temporary or partial solutions may not now be politically viable, Sonders said.

“In the past there was no political downside to kicking the can down the road,” Sonders said. “But never has the concern about debt and the desire to see something be done about it be as high up on the list of things that voters care most about.

“The only credible plan in terms of long-term success and public agreement has to be a true compromise,” she added. “The only way to keep from it being a much bigger problem (is) to make some hugely unpopular decisions.”

(Editing by Padraic Cassidy)

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