David Kotok, Chairman & CIO at Cumberland Advisors, appeared on CNBC to talk about how expectations for another round of Fed money printing (more politely known as QE3) have changed as a result of Fed Chairman Ben Bernanke’s speech yesterday.

It looks like we’ve begun a giant game of “chicken” between Bernanke and markets.

Obviously, if stock prices stay at current levels and the slowdown in economic growth is modest, then QE3 is off the table. But, if the developing correction in equity markets turns into a 10 or 15 percent decline from its recent highs, then it will be interesting to see if the Fed blinks and starts talking about QE3 as they did a year ago for QE2 (when equity markets fell 16 percent from May to July).

In John Hussman’s weekly commentary today he takes a look at our deteriorating economic and financial market condition and, in doing so, introduces his reading audience to a new word – recrudescence – that, somehow, seems especially fitting these days.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we’re coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial “wealth effect” for the economy as a whole. The historical evidence is emphatic that people consume off of perceived “permanent income” – not off of volatile dollars. Wealth is driven by the creation of long-term cash flows through productive investment, not by boosting the valuation of existing cash flows by encouraging speculation. There was no reason for people to take much of a permanent signal from fluctuations in a stock market that has lost more than half of its value twice in a decade (and is likely to lose a good chunk of its value again if history is of any indication).

So while the Fed has been successful in fostering speculation, further impoverishing the world’s poor through commodity price increases, and subsidizing banks by driving funding costs to zero (at the expense of the risk averse and the elderly), QE2 has clearly failed from an economic standpoint. This failure is not because we haven’t given it enough time, or because monetary policy works with a lag. Rather, the policy has failed because it focused on easing constraints (bank reserves, short-term interest rates) that weren’t binding in the first place. Very simply, neither the Fed’s policy, nor the fiscal policy initiatives to date, address the central challenge that the U.S. economy faces, which is the debt burden on households.

The salient problem in the U.S. economy isn’t the precise level of already low mortgage rates. It isn’t “uncertainty” about taxes or health care. The problem is that people aren’t spending as they did in recent decades, because that spending was largely debt-financed, and the pressures now run in the opposite direction.

He goes on to assess the possibilities of QE3, noting that it is unlikely, largely due to the fact that QE2 didn’t have the desired effect, so why should QE3 be any different.