THE BLOG
03/09/2011 04:41 pm ET Updated May 25, 2011

June 30 Could Be The Ides Of March

Strong, graphic language, but just the kind you might expect from fixed-income goliath Bill Gross, the managing director of PIMCO, the world's biggest bond fund with assets of more than $1 trillion.

In brief: "By eliminating QE2," he says, " the Federal Reserve would be ripping a Band-Aid off a partially healed scab. Ouch!"

And that brings us to the most critical issue confronting Wall Street today -- no, not how high oil prices will go, but the question of whether the quantitative easing world will produce QE3 when the Federal Reserve's $600 billion QE2 economic stimulus program -- engineered by the Fed's purchases of Treasury bonds -- winds down on June 30.

In a nutshell, the Fed's plan is to create a "wealth effect" by buying Treasuries. The theory here is as asset prices rise and consumers feel wealthier, they'll spend more, in turn helping to revitalize the economy.

QE2, which kicked off last August, has hardly been a world-beater, although it did help boost business confidence somewhat, leading to peppier corporate spending and some increased hiring; It also helped trigger about a 20% rise in the Dow and an estimated 1.5% drop in long-term bond yields.

In contrast, QE1, which began in November 2008 and ended last March, didn't goose the economy that much, many financial pros feel. It was, though, a temporary market booster for a few weeks, but after it ended, stock prices were whacked for about a 20% decline.

Many have their doubts about quantitative easing, Gross among them. The question, as he sees it, is whether easing policies actually heal, as opposed to covering up symptoms of an unhealthy economy. Or, he adds, "whether it is possible to cure a debt crisis with more debt."

Madeline Schnapp, the economics skipper at West Coast liquidity tracker TrimTabs Research, raises the worrisome issue on every market player's mind: Who will buy the Treasury bonds if QE2 ceases on June 30? At current levels of deficit spending, the U.S. must sell enough Treasuries to cover the gap between the government's expenses and its revenues. If it doesn't. interest rates will go higher and that could kill economic growth.

With some pros, Gross among them, griping that Treasury yields are about 150 basis points or 1.5% too low, given expected GDP growth, potential buyers, it's thought, could view new T-bond purchases -- roughly 70% of which are currently being done by the Fed -- about as appetizing as a cold cup of coffee in freezing temperatures. So replacing the Fed's Treasury purchases without a higher yield hardly seems like a sure thing.

Given, Schnapp says, that the economy, though doing better, is still on life support (backed by QE2 and fiscal stimulus), she figures there's a 60-40 chance we'll see QE3. That means, she notes, the government will spend more money, the dollar will be devalued, equities will get more support and the economy will grow moderately. Without QE3, she believes, we would probably see another 20% drop in the stock market.

TrimTabs CEO Charles Biderman also looks for QE3, which he thinks would be created next fall if economic growth slows. But he ridicules it, noting the government has spent $5 trillion on QE1, QE2 and other stimulus, that the economy is not growing fast enough to pay interest on it and that the government will have to borrow another $1 trillion next year to pay its bills.

"It just doesn't work," he says. "It's a short-term fix that makes investors feel better and it's good for the re-election of current politicos. But long term, it's horrible because we're borrowing more than we can afford to pay back. If that's not sheer insanity, what is?"

Peter Morici, the University of Maryland's economic guru, tells me "I don't see QE3, too much inflation and opposition on the Hill." It's unfortunate, he says, because it's really needed. As a result, he notes, long-term interest rates will rise, housing will be further impaired and the economy will suffer.

Speaking of the economy, Morici contends that if the recent surge in gasoline prices sticks through spring, it will reduce 2011 GDP growth from a projected 3.5%-4% range to 3%-3.5%. Overall, he points out, that would translate into 600,000 fewer jobs. Moreover, he says, lost taxes exacerbate federal and state budget problems.

Standard & Poor's chief economist, David Wyss, also doesn't see a QE3, but for a different reason. The economy is behaving well enough, he says; rates are low and the market can cope with end of the QEs.

Interestingly, a number of Fed officials, including Richard Fisher, the head of the Federal Reserve Bank in Dallas, share that view.

These conflicting QE3 views all conjure up that memorable line from Hamlet's soliloquy -- "To be or not to be."

That surely is the question on Wall Street.

What do you think? E-mail me at Dandordan@aol.com