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I don't know if it is really pointless. QE has encouraged me to save less and invest more. My real return on savings is negative and I'm not the only person fighting negative returns. QE pushed many of us into investing more in our stock market. Judging by the last two rounds of QE, we can expect another drop in the market followed by another huge bull run from around November up until the end of April. QE may not be doing much for the economy or the little guy but it really helps my portfolio. I hope to see QE4 November 2013.
So what happens if the market suffers a steep decline? Would you still be a fan of QE?
If inflation continues at its current pace that is a very real possibility. Markets hate inflation; just look back on the market of the late 70's.
Poor economic fundamentals like QE do not come without a price to be paid at a later date.
For every action, there is an equal and opposite reaction. QE fabricates a false market for treasuries which facilitates government spending at unsustainable levels. That spending is not predicated on increased GDP so the dollars the government pumps into the economy by way of that spending is inflationary.
In addition QE facilitates purchases of underwater assets held by financial institutions at a premium to their asset value creating profits out of loses for those institutions. Most of those institutions like Goldman and Chase have reinvested those profits into equities and commodities speculating and driving higher prices.
This is just the most recent in a long series of lies. Here is a list of some of Bernanke’s most memorable in case you have forgotten….
• (October 20, 2005) "House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals."
• (January 10, 2008) "The Federal Reserve is not currently forecasting a recession."
• (When asked directly during a congressional hearing if the Federal Reserve would monetize U.S. government debt) "The Federal Reserve will not monetize the debt."
• (March 28, 2007) "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
• (October 31, 2007) "It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."
• "The GSEs are adequately capitalized. They are in no danger of failing."
• (June 10, 2008) "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
• "The financial crisis appears to be mostly behind us, and the economy seems to have stabilized and is expanding again."
I don't know if it is really pointless. QE has encouraged me to save less and invest more. My real return on savings is negative and I'm not the only person fighting negative returns. QE pushed many of us into investing more in our stock market. Judging by the last two rounds of QE, we can expect another drop in the market followed by another huge bull run from around November up until the end of April. QE may not be doing much for the economy or the little guy but it really helps my portfolio. I hope to see QE4 November 2013.
What are you investing in? The stock market has lots of companies currently investing in rent seeking. Software patents that block producers rather than protect them is a classic example of what is going on out there now.
Unfortunately its a pretty mixed bag. If you invest in something that improves productivity while another drives up prices with uncompetitive behavior, it goes nowhere.
The money dumped here is anti-investment and anti-production.
It is speculation to say it QE didn't work since it we don't know where our economy would be if it hadn't been initiated.
The ancients speculated on the source of water when it rained. Now I know that evaporation and condensation cause rain. Its not speculation at all. Money that flows into industrial capital creates demand for labor to build it and at times creates demand for more labor if not a move towards more efficiency. Money that flows to bloat asset prices that cannot be expanded by the addition of labor will continue to sicken the economy. In other words, its only speculation when you don't know how it works.
QE1/2 has helped keep the US Economy afloat. Pumping over a trillion dollars in the US economy has produced the wonderful situation we have today of barely 2% growth and assuming that's nominal growth (i.e. before inflation) then basically a growth rate of 0% after inflation. If the Fed didn't pump money into the economy, we'd be in a negative growth scenario (formal recession) and possibly experiencing deflation right now. So I think QE1/2 have helped provide a lifeline to the economy but it has not help pull the US economy out of it's current state, in order words, the economy still needs crutches and has not healed. I believe the government was 'hoping' that it could help pull the economy out of its state or at the very least buy time. I'm not an economic expert historian (I'd love to hear from someone who is on this board) but I believe this is how they eventually got out of the Great Depression, although they did not keep the stimulus (QE) as strong or consistent in the beginning which caused a very prolonged downturn. Japan has a similar story except they never got out of their mess. The scary part right now is that there are not many signs that the US economy doesn't need it's crutches. I wish I had the answer but I'm not sure how you get out of a no growth scenerio by continuing to spend money you don't have. Given that US debt is at the 100% of GDP level, it will cripple the economy for a very long, long time to keep increasing debt. Look at Europe and Japan. So forget Government spending, I think printing dollars is the Fed's only option and QE3 will happen at some point as most are expecting it. This weakens the US dollar and builds the case for inflation to come down the line but a weak dollar helps improve Exports-Import trade imbalances (particularly with China) and lowers the value of the debt held by creditors. Now the conundrum is that QE3 may just be the same as QE1/2 or it may even be less effective because the market is expecting it and just won't take the extra cash and spend it on productive assets and hiring people to lower employment. I don't know how and when this will actually take hold, especially with Europe about to break apart and the emerging countries slowing down. It's doesn't look pretty out there so I've been shorting weak companies all year and holding fixed income securities and have done well. But that's a different topic. The problem is that businesses will only spend money and hire people when they have a stable outlook and unfortunately no one is optimistic. There is too much of a mess in the world that the US can't control right now to create a stable outlook for businesses to really start spending no matter how much credit you create. I wish I had the quick solution and I don't think a tax cut by itself will have the kind of effect to lift the economy in this state.
So because we can't control the world or even our own private investment and consumption, the effects of QE by itelf are limited. Why not use a moderate amount of QE to help keep us afloat but we also focus on cutting our debt and bringing it down to managable levels, even if this means continued pain of low to no growth for years. It is proven that economic growth stalls once Debt-to-GDP hits a certain level that we have far exceeded so this needs to be corrected if we are to prosper. Consumers also need to reduce their debt in the wake of the housing meltdown and this will take years. If the country has lived above it's means for 10 years since the 2001 dot com bust then this is not something that can be corrected in a short timeframe. Yes, I will say it, but having the wealthy pay some more in tax to help support insitutions to get families through a period of deleveraging makes sense. It should be insignificant to a wealthy person's lifestyle but help keep put food on the table for the working class who are in the worst shape. I don't want to be a politician but the not so material tax rates can come down one day when this mess is over. We should also focus on retraining our unemployed. There is a huge generational gap of people who have skills that are shipped abroad and we need to find ways to redeploy them in our new economy. Just giving them EI and telling them to look for jobs that aren't there isn't a sustainable solution. And there needs to be a lot incentives (like tax rebates) to keep businesses incentivized to spend in targeted areas. I know they exist but they need to continue to be there to improve capex and hirings. This can partially be covered by covering tax loopholes for big companies. Additionally, I will say it, a major part of why Government debt has got out of control is because of military spending. Reducing it signifcantly and getting out of foreign lands will free up so much room to delever and redirect spending into institutions like health care, education, and government incentives. We don't need to spend as much as the next 10 countries combined on our miltary, spending something like the next 5 should be enough and could make a huge difference. (I don't know the exact numbers but you see my point). I'm not sure if everything I'm saying is realistic or not as I'm only a wannabe economist but I think there is no short term fix right now so we need to change our attitude and expectations. We need pull together and help get through this with policies that help everyone and think long-term by building the environment & incentives to grow, even if it will take years, so that our seeds will one day grow and when the dust settles, American will remain great.
It is the very definition of speculation, you have no idea what the impact on something as complex as the global economy would have been if the fed hadn't engaged QE.
QE was never intended, nor did anybody believe, that it would return the US economy to full employment.....the purpose was to simple prevent a depression like slump.....and we've achieved that so far.
It is the very definition of speculation, you have no idea what the impact on something as complex as the global economy would have been if the fed hadn't engaged QE.
Just because you don't understand how it works does not mean other people don't. My timing can be off several years but I was in bonds by 2000, bought oil and gold in 2004 and, and dumped REITS in 2006 more or less because I know about things like the 1894 rail road bubble. I know the diffrence between capital that employs people and rent seeking that does not.
There are not so many moving parts as you think in a macro economy. The neoclassical economists pretend there are only two. So they are indeed way too simplistic. You need to know these and how they interact.
1. land
2. labor
3. capital
4. finance.
When money flows into land, unemployment is nigh because more demand for land cannot be satisfied by adding labor unlike a demand for widgets. Same reason why high inflation because of oil in the 70s did not make for high employment.
I said we will have deflation in October of 2008( not hyperinflation like some of the nonsense I saw).
Then I said we will stagnate unless real change occurs becasue I saw nothing beyond the first QE. . I also mention I don't see after the first QE what will absorb new debt? Was I right?
The reason is simple. At the first QE, even people with equity in assets could not get money. Now the people who had equity got the money they wanted while the rest cannot borrow because they have no equity in anything to secure a loan.
It only seems complicated because much of the economic theory has been dumbed down to discount the role of finance and real estate. That is because those things are controlled the very wealthy; they like those theories that say they create wealth and do no harm owning and charging access for vast swaths of land and minerals.
QE was never intended, nor did anybody believe, that it would return the US economy to full employment.....the purpose was to simple prevent a depression like slump.....and we've achieved that so far.
And it was only the first QE that would. Now all it will do is inflame rent seeking. Low interest rate?
1. Will bloat asset prices relative to wages.
2. Will keep assets speculatively out of reach.
- think of a job that pays $10 an hour next to an apartment building rising in rent. Wages must either rise or the worker below subsistence must quit, leaving the apartment space speculatively too high in price.
When rents are too high, space is worthless for productive use.
The employment cure all along was defaults, lowering housing prices and rents, higher interest rates, progressive tax relief, and large government deficits, the exact opposite of what we did.
1. Will bloat asset prices relative to wages.
2. Will keep assets speculatively out of reach.
- think of a job that pays $10 an hour next to an apartment building rising in rent. Wages must either rise or the worker below subsistence must quit, leaving the apartment space speculatively too high in price.
QE will not bloat rents, rents are determined by supply and demand and there is no shortage of capital to build new structures. If anything QE should lower rents as it lowers the borrowing costs to build new structures....
Also, though residential rents have been increasing lately, largely due to years of little to no building, commercial rents are still depressed. When I renewed my commercial leases ~6 months ago I was able to negotiate a number of improves into the lease (effectively lowering my rent by ~5%) and zero increase in rent for 2 years. There is still a large oversupply of commercial property throughout the country......but residential is finally starting to normalize which will spur increased building in response to higher rents.
So, like I said, QE was never intended to return the US economy to full employment....or anything of that nature. Instead QE is being used to reduce interest rates across the board, and it has been effective in that regard. Thus, the idea that QE1 or QE2 have been failures is highly mistaken, they achieved their goal...
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