miserable failure QE has been. David Faber over at CNBC did a pretty
good job. Tyler Durden at Zero Hedge had this to say (Link). A smart fellow I know sent me some charts on this line of thinking. Bottom line; If you exclude the fact that QE did
juice the stock market, it did nothing measurable for the real economy.
The reason that we will not see QE3 (IMHO) is that even Bernanke knows,
QE didn’t do shit.
The follow charts look at various indices of economic activity and
tracks them against a basic measure of QE; the size of the Fed’s balance
sheet.
The early portion of this housing price chart appears to track the
implementation of QE. Don’t be fooled. That temporary increase in prices
was attributable to first time buyer tax breaks. It’s clear that those
fiscal incentive just stole from future consumption. After the tax
breaks expired housing prices resumed their decline. QE had nothing to
do with the blip back in 09. QE2 accomplished nothing at all for the
slump in RE.
In this chart I see no evidence that QE1 (and especially QE2) had any
measurable results on economic growth. The GDP increase in 2009 was a
consequence of ARRA (the $800b stimulus program). As the spending waned,
so did GDP. Government spending does directly contribute to GDP growth. QE had little or no effect at all.
The Fed may well use a chart like the following in an attempt to prove
they moved the needle on employment. Recall that the census hiring was
the cause of the spike in jobs back in March/June of 2010. I would argue
that the very tepid increase in jobs over the last year is attributable
to people being forced to take work they don’t want rather than
true/healthy job creation.
If Bernanke ever did try to defend what he has done as being "pro jobs" I
would snap back with the following chart showing where we have been and
where we are now. The bottom line on jobs is that for all of the
trillions in government spending and the huge increase in the Fed’s
balance sheet we are still only back to levels of employment we saw ten
years ago. (That housing prices (on average) are also back to 2000
levels is no coincidence.)
Both Bernanke and his ace boy, Brian Sachs, have repeatedly said that
the best measure of the success of QE is the impact that it has had on
equity prices. The correlation to the expanding balance sheet of the Fed
to the higher S&P is 85% R^2. Based on that, one can safely assume that cheap money does support higher stock values. I say, “Who cares?”
The graphs above all show that nothing positive has happened in the
real economy. The benefit of higher stocks has a very limited impact on
consumer spending. Yes, stock ownership is fairly broad. But for most
folks with a 401K it just means they have recovered a portion of their
retirement savings they lost a few years ago. The top 5% in the country
have a made a bundle. Like I said, who cares?
I'm hoping that Bernanke does try to use the “QE is good for stocks” argument one day. It will blow up in his face is if he were to try.
That correlation between stocks and QE at 85% is matched perfectly with
the correlation between QE and the rise in commodity prices. So really
what QE brought us is that the fat cats of or society got, well, fatter,
while the other 95% of the population was stuck with the bill for
higher prices of everything we consume.
Note: The charts for both stocks and commodities have had their lines crossed of late. That is a very big red flag.
I think this chart says it all as far as QE goes. The rise of QE and the rise of food stamps are lock stepped. Can you say failure?
This last chart has a question mark on it for good reason. It
looks at the QE time period and tracks the performance of the ten-year
bond against the S&P. Note the near perfect correlation between the
announcement of QE 1 and 2 and bond yields. Rates go up when we have QE,
rates go down when there is no QE. How to read this? Does it mean that
without daily QE the economy will fall flat and yields will fall? Or
does it mean that the ‘market’ is so afraid of the implications of QE
(monetization) that when the policy is in force players hate bonds? I
think it could be a bit of both.
Note that at the end of this chart there is a divergence developing.
That divergence started exactly when Bernanke announced that QE was
over. That is no coincidence. It has been my observation over many years
that the bond market is a better predictor of the future than the stock
market. The bond market is giving some very heavy signals that it sees
trouble ahead. One thing you can count on. This divergence will not last for long. Either interest rates are going to rise in the coming months or stocks are going to take a hard whack.
H/T Johan
It is certainly clear that QE hasn't restored the economy to its pre-bust vigor. And in fact, things generally don't seem any better now than they were before QE started. But we can't know what things would have be like if QE hadn't been implemented. During the QE period, banks have greatly increased their excess reserves, which removes currency from circulation and this would generally be deflationary. But overall, we haven't really seen much deflation. Home prices have declined, but gasoline and other prices have risen and I think wages have been pretty much stagnant. I personally think that QE was mainly intended to offset the deflationary effect of excess reserve increases, and perhaps it may have done that. Remember all the deflation warnings and predictions of doom a few years ago? So far, they don't seem to have come to pass.
I don't think that you can expect the Fed to magically fix bad policy decisions made by Congress and the President. Basically, the Fed's main power is to control the amount of money in circulation. If it puts too much or too little money into circulation, it can certainly hurt the economy. But you cannot expect it to perform miracles, particularly when the politicians insist on implementing reckless economic policies.
Nice try Big Ben. It was known to be a disastrous (high probability) decision.
"Who knows" belies the low probability of success, that was well known.
"Basically, the Fed's main power is to control the amount of money in circulation."
False statement Rasputin, it is to manage the cost of of real interest rates which impacts the supply of money.
Get the real facts or be accused of obfuscation.
All that QE has done is to transfer even more money from the middle class to wall street/top 1% through higher commodity and stock prices courtesy of all that hot money. A little deflation would at least help the middle class a little.
True.
Deflation is portrayed as the great enemy to be stopped at all costs - people put off purchases... blah blah - but really its the friend of the ordinary person.
And accepting it would have a lot cheaper.
QE was/is to inflate the debt away anyway.
Anything else is just a side issue/collateral damage for the predatory class.
110% Big Duke.
I think that deflation generally benefits the wealthy people who have or are owed a lot of money (because their money buys more) while inflation tends to benefit people who owe money.
As an example, in the early 70's my parents bought a new house. They agonized over the decision because they could barely afford the interest payments. But by the early 80's inflation had caused their salaries to go up several times (even though they didn't change jobs). And the value of the house had more than doubled due to the inflation of the 70's. But the mortgage payment hadn't changed and was now a much smaller percentage of their salaries.
So is the average American rolling in money? Or is he up to his ears in debt? My sense is that there are a lot of people out there with underwater mortgages who would actually benefit from some inflation.
And of course Uncle Sam is definitely up to at least his chest in debt. Which is why I am absolutely sure that inflation is coming eventually. But possibly not for a few years. When Uncle Sam maxes out his credit card, then the Fed will open the money spigots and we will experience inflation like we have never seen before.
Excellent, Bruce.
Is it possible to graph the amount of captured, to be smuggled, USTs vs QE?
Or maybe against number of teleprompter words?
The fall of commodities and stocks if QE is scaled back just to investing maturities will get the needed treasury purchases going forward for some time.
I would argue that the very tepid increase in jobs over the last year is attributable to people being forced to take work they don’t want rather than true/healthy job creation.
Right, because most people work out of sheer love for the job. Pretty pissweak argument.
Outsourcing to cheap labor/workers in foreign countries is killing us. I think I read almost 70% of all the new jobs created now pay 15 bucks or less an hour in the US.
It took me a long time to get to $15 bucks an hour.It ain't the amount it's what it buys and no doubt it doesn't go as far as it used too.
Good post bruce.
QEII was to finance the government, nothing more, and nothing less. I think the real question is- is Bernanke willing to do it again if not enough funds come out of equities to sustain the government's borrowing. I am leaning against him willing to do it again, but we shall see.
the whole purpose of QE was to bail out the bankstersand Wall Street so they could band-aid their portfolios and be in a better position to bankroll "King O" and secure some congressmen'sre=election. It sure as heck didn'tdo much for the economy as pointed out in this article. We should expect QE infinity as once we have started down this rabbit hole we will have to continue to throw more $$$ downthe hole. Can we say..."welcome to Japanville"....
Ok let once again ask the stupid question, if no QE then were will the 1.6 trillion a year from here to eternity come from? Will the world throw what 2-3% of global GDP into the Federal Deficit Maw every year for all eternity? Have to ask what's more likely, responsibility from the elected criminals and the army of unaccountable bureaucrats and the ruling oligarchy or Zimbabwe Ben to go back to the QE well?
Someone really bright once said: QE is like violence -- if it isn't fixing the problem you probably just aren't using enough of it...
Just because everyone, even Bernanke, knows that QE didn't do shit, it does not necessarily follow that we won't see QE to infinity. QE didn't help the real economy, granted, but it was never intended to. Instead, it put money into the right pockets, and that's why I think we may see more. That may be the saddest part of this whole criminal failure.
Yes, it is the wrong question asked.
Bernanke isn't interested in "Did QE do shit?" but instead in "what else could I do that doesn't blow up / implode the economy even faster?
Answer: no other option available.
Doing nothing is obviously also not on his radar.
No. The saddest part is that they are saying "Bend Over" and we are yelling "We'll grab our ankles!"
Highly-productive Americans are the ex-pats of the intermediate future. See ya in a bar in Santiago.
Writing from someplace in Normandy, I can tell you it isn't a whole helluva lot better over here in France. I've been thinking about Chile myself, but French is my second language. Ah well...maybe you can teach me some Spanish over a beer. What, about October work for you?
Don't be too hard on France. Have a large Calvados and you might be inclined to reconsider.
Once the China bubble pops (it is already leaking badly), the ancillary bubble countries such as Chile, Australia and Brazil will come crashing back to earth as well.
I have to agree. Bernanke is a One Trick Pony. What other option does he have but more of the same? Once the TBTF balance sheets are strong enough in nominal terms to stand realistic marks then he might try something new but unlikely until then. Of course the whole thing might blow up in his face in the mean time...
Bruce,
Your assumption is that Ben really thought QE1-2 would help the economy and not just funnel money to the banksters and juice stocks/bonds/commodities in an ocean of liquidity. That is a very trusting attitude, and if true, makes Bernanke a complete and utter failure.
He's either
a fool who believes in the magic of infinite debt.
-or-
a sociopath.
-or-
knows the system is doomed regardless and is just playing for time and hoping for a miracle.
I totally agree with his assessment also why is it a red flag when commodities and stocks cross?
To me, it is a red flag as it is a signal that things are in the process of changing direction.
IMHO, you are missing the point. QE was never done to fix the economy. It was done to reduce the value of our debts (Federal, state and local, and personal). Its the hidden tax we don't get to vote on.
Its hard to figure out timing on things but the way I see it, It was MENA in the spring, Europe, in the summer to fall, China in the fall to winter, and the US in the spring. The circle will be complete.
The financial markets will hold until the the faith is lost. My guess is somewhere between China and the US crashing. My .02.
wrong, QE was done to get the money the rich people lost in the crisis back to them so they could maintain their status. it was a move top get money into insolvent banks so they could pretend. Qe was also a cover up so people didn't look too hard at what a failure the fed is.
Right - and to rebuild the Fed's balance sheet. They need to get what little return they can from Treasuries (the taxpayer) to cover up all the garbage they have on their balance sheet (worthless mortgage derivatives.)
Yes, both Bennie and Timmy don't need to be under oath to say their job was to fix liquidity and debt, the rest was up to Bushco and the big O. That B&T have done a superb job at it by fixing historic low market prices for cheap lending and buying treasuries is no act of genius, but both deliberate and desperate. It indicates the integrity of the rest of the world to sustain this bullshit. But the real atlas (not the Michelin 'made in the US' inflated plastic one) is now getting tired of being your water boy.
The Fed did not do this for commercial self gain, nor is it worried that you want to end it. It does not care how much (or even if there is any) gold (is) left. Rumours alone are sufficient because you do not have even a remote chance of finding out.
The best thing is now you have 3 carry trades in the JPY, USD and CHF (not including HKong) to choose from. So this little charade of cheap money policy has now gone viral and no longer needs the Fed. The JPY is still a lead indicator in many ways, but you'll find the CHF is is hands down cheaper with Hong Kong bending over to keep up. Consider HongKong the UK/US financial desk of China.
One day the B&T show will claim victory by raising rates. Another appearance on the cover of Time for "Team Dare to Dream" maybe portrayed as coming out of the shadows of their Mesiah.
Rinse, repeat. See you at the next high, when inflation makes even the paperboy a millionaire, and a 2 bed Penthouse sells for a $billion. Nothing is fixed, because no-one thinks anything is broken. Beyond this, maybe more will realise the financial markets haven't just cornered the shadow US Gov't, they own it lock stock and barrel.
The US is puppetry in motion to anyone with more than 2 brain cells.
The only reason it failed is because the Fed didn't spend enough. Just ask Krugman. /sarcasm
Krugman was on Charlie Rose tonight saying just that! Everything would have worked out fine if we just did more. Plus, the nutjob said we should be targeting 4% inflation, not 2%. That'll help the working man. It must be great to be so smart that one can never be wrong.
http://www.youtube.com/watch?v=5SgTi9QPAng
krugman on letterman two years ago.
Nice. Could also be worth looking at a chart of the SPX priced in gold.
I agree. As PMs shift from acting like commodities to acting like currencies, we should use them as benchmarks.
The misery index says it all.