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"Something" Happened: What The GDP Report Means
- Case-Shiller
- Commercial Real Estate
- David Rosenberg
- default
- fixed
- Foreclosures
- Gross Domestic Product
- Initial Jobless Claims
- Monetary Policy
- Money Supply
- None
- Personal Consumption
- Personal Income
- Personal Saving Rate
- Quantitative Easing
- Real estate
- recovery
- Regional Banks
- Rosenberg
- Savings Rate
- Stagflation
- Unemployment
This article originally appeared in The Daily Capitalist.
Readers will recall that I had noticed that "something was happening" in the economy. After several years of ultra-bearish reporting, I reported that at the very least the economy was not declining further and that perhaps a bottom was forming which would indicate positive news for the economy. I cautiously reported that a "trend" to recovery was not yet evident but that indeed, something was happening. I noted that almost none of my bearish peers seemed to note this trend.
Much of this positive news is a result of quantitative easing (QE) and is not real.
Today's GDP report showing a 3.2% gain for Q4 2010 was more positive than I had anticipated, but it is trending in the right direction. In my November article I anticipated GDP would continue to be "flat" in Q3 and Q4. While I was mostly accurate with Q3, I underestimated Q4. Understand that these are preliminary numbers, and the revision on February 25 may be different, positively or negatively.
There are huge caveats to this GDP report which gives it a mirage effect, as I noted yesterday. But first let's examine the numbers.
Real personal consumption expenditures increased 4.4 percent in the fourth quarter, compared with an increase of 2.4 percent in the third.
Durable goods increased 21.6 percent, compared with an increase of 7.6 percent.
Nondurable goods increased 5.0 percent, compared with an increase of 2.5 percent. Services increased 1.7 percent, compared with an increase of 1.6 percent.
Real nonresidential fixed investment increased 4.4 percent in the fourth quarter, compared with an increase of 10.0 percent in the third.
Equipment and software increased 5.8 percent, compared with an increase of 15.4 percent.
Real exports of goods and services increased 8.5 percent in the fourth quarter, compared with an increase of 6.8 percent in the third.
Real imports of goods and services decreased 13.6 percent, in contrast to an increase of 16.8 percent.
The change in real private inventories subtracted 3.7 percentage points from the fourth-quarter change in real GDP after adding 1.61 percentage points to the third-quarter change. Private businesses increased inventories $7.2 billion in the fourth quarter, following increases of $121.4 billion in the third quarter and $68.8 billion in the second.
Real final sales of domestic product -- GDP less change in private inventories -- increased 7.1 percent in the fourth quarter, compared with an increase of 0.9 percent in the third.
Current-dollar personal income increased $128.3 billion (4.1 percent) in the fourth quarter, compared with an increase of $75.7 billion (2.4 percent) in the third.
Disposable personal income increased $99.6 billion (3.5 percent) in the fourth quarter, compared with an increase of $47.1 billion (1.7 percent) in the third.
Real disposable personal income increased 1.7 percent, compared with an increase of 0.9 percent.
The personal saving rate -- saving as a percentage of disposable personal income -- was 5.4 percent in the fourth quarter, compared with 5.9 percent in the third.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.7 percent for the year.
Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent for the year.
The bottom line here is that consumer spending was up (4.4%), the biggest increase since Q1 2006, and imports were down 13.6%. Annualized, GDP was up 2.9% in 2010. Core prices were +1.3% for the year.
There are are several important caveats to note while interpreting GDP. The first is that it is a fictional assessment of the economy. It tries to measure aggregate output through spending which results in a meaningless statistic. I do not wish to get into this point as an abstract discussion of economic theory, but for those who are interested, here is an excellent distillation of an explanation of this idea.
The other fact to consider is that if all GDP measures is spending, then an increase in the money supply by the Fed would increase spending. Again, since fiat money cannot be a source of wealth, a rise in GDP as a result of Fed money "printing" cannot be a real economic gain. If it were, then Zimbabwe would be the richest country in the world.
But, the significance of GDP cannot be overlooked since it what the Fed looks at the determine monetary policy.
That aside, what can we take away from GDP?
1. Most of the increase in GDP is the result of QE1 and QE2 monetary stimulus. Ultimately the Fed will "print" $2.2 trillion and pump it into the economy. That has one initial destination: Wall Street.
2. Most of the increase in the stock markets is a result of QE. The increase in company bottom lines is a result of efficiencies, but exporters have had the best returns.
3. A declining dollar has lifted exports and inhibited imports. The dollar has been on a slide since June 2010 which makes US exports cheaper and thus more attractive to foreign customers. The cause of this is QE.
4. The concept that imports are bad and exports are good is false. History has shown that with the rise of imports (since the early 1980s) that the economy has not collapsed, but rather has benefited from trade. This is one of the fallacies of the economic concepts behind GDP. Thus, the decrease in imports and increase in exports will not be a real economic positive. (I am working on a major article on free trade.)
5. Spending is coming mostly from wealthier Americans, not the middle-class. Wage growth has been stagnant, real disposable personal income expanded a modest 1.4% for the year, and the personal savings rate continues to be historically high (5.4%). It appears that increases in wealth has come mostly from debt reduction, not the stock market.
6. Recent (post 2010) spending data is down.
7. Inventory was a drag on GDP, down 3.7% for the quarter. This was a "surprise." This is the biggest decline in 22 years according to David Rosenberg. This is significant: if consumer spending continues to drop off, one wonders what will happen to the manufacturing sector. The latest durable goods report was a -2.5% in December.
There continue to be the factors that act as a drag the economy. These are serious headwinds to a recovery.
-
Unemployment remains high at 9.4% (16.7% on the broader U-6 scale). The recent report of initial jobless claims went up 51,000 last week to 454,000. I don't see much that would result in strong employment growth. This is one of the drivers of the Fed's QE policy: the more unemployment remains high, the more money they will pump into the economy.
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Real savings, the capital accumulated and saved from the profit or wages of productive enterprises, still appears to be deficient since production is not expanding sufficiently to expand employment. Banks and individuals continue to deleverage, and lending is still weak, further evidence of a lack of real savings.
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The Fed is inflating. The True Money Supply (Austrian theory) is up 10% the past six months and 15.2% the past three. This increase was measured before the impact of QE2. This monetary inflation will act as a drag on the economy as it eats up savings and capital.
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Home prices continue their slide according to the recent Case-Shiller report. In addition, the shadow inventory hangover is high: last year 2.8 million homeowners received default notices. More are anticipated this year. Commercial real estate is still declining and those foreclosures will continue to impact the ability of local and regional banks to lend.
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The deficit is anticipated to be $1.5 trillion this year. This is starting to have an impact on Treasury rates: they have been going up, making it likely that the deficit will increase further.
The bottom line is that we are seeing monetary inflation and it is impacting prices. Real savings is still in short supply and that is inhibiting growth. Spending will not revive the economy, but an inflated money supply will give the impression of economic improvement, but it will be an ephemera. It will further negatively impact real savings. I would expect similar GDP numbers in Q1 2011, perhaps a bit weaker (wait until the revised Q4 come out to see if I'm right). Unemployment will remain high. This is a recipe for stagflation.
This GDP report is much ado about not much.
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A former Sec of Treas. once told me " there are only two ways to becoming wealthy--1. save money 2. create money. Obviously, for the past 25years we have been overly dependant on creating money at the expense of savers.
So, all theorys aside, for the individual or governments, the essential question is who will in the end survive ? History suggests the saver, but the jury is still out while we are still " creating " wealth
"Annualized, GDP was up 2.9% in 2010. Core prices were +1.3% for the year."
Real simple: the GDP was actually up 1.6% on the core. Flat, adjusted for inflation.
We're going nowhere fast. Get used to it. Nothing wrong with recession/deflation if you're prepared for it.
whats with the spike in durable goods, vs drop in imports. are more families opting out of a second car, and buying a jet airliner from Boeing instead?
Key points: Incomes up but not as much as inflation. Imports up by destroying USD purchasing power.
Purchasing power and total personal income should be the targets for economic wizards.
I guess I am ignorant since I did not get my Phd.
Government employee salaries, interest, taxes, legal and accounting fees are not product, so why are they included in GDP?
By the current reasoning, we should just borrow more and more to pay more and more government employees and GDP would be booming.
Oh, so only the government has useless bureaucracy and kleptocratic weasels? Ambulance chasers, insurance managers, banking executives, consultants, all of them worthless at best and they somehow count as GDP!
Much of the durable goods was pilling on of more risky financing by auto sector. The Balance of payments has not improved on trade. John Williams at Shadow stats has the alternate GDP for last month at -2.1%. Until savings increases monetarist are pushing on a string. You have to question what reference frame measurements are taken from. When you can place 563,000 people on the non participation list the numbers are questionable.
Nice work ebworthen! i enjoyed your discussion more than the article...
ditto
Thank you both, and thanks also to those who jumped in.
Looking past the headline number, there were some very strange sectoral changes, especially imports and inventories. There was an excellent explanation for this from an article by John Mauldin explaining that the changes were mainly caused by the rise in oil proces, excerpted below...
Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation / deflation. This is done by the use of a deflator built in for each category. But the deflator for exports / imports is a little tricky at times.
Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse.
Oil in the 4th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.
http://seekingalpha.com/article/249548-a-bubble-in-complacency-how-much-...
Thanks for posting Mauldin's piece. Saved me the time. It's quite relevant.
you look at the yield of the carrot. I look at your ass ...
Excellent article. I think there is a missing piece to the puzzle that casts a greater pall than Econophile is showing. One of the themes running through upper middle class (AMT lower range) and lower upper class (roughly AGI of $ 400k) is involuntary credit tightening courtesy of previously compliant lenders.
Despite impeccable credit scores and having kept all their financial ducks in a row, these "sous-riche" have discovered - if you have to ask for more credit, you probably won't get it.
This is creating cash flow hardships ranging from "doing without" (no new Lexus this year) to potential calamity - that mortgaged home they left behind three years ago for the promotion/relocation that no longer fits in the budget now that the eldest started their first year at a $ 60k/year PUBLIC university last fall.
The "sous-riche" are a large part of discretionary spending. They have been fiscally responsible. The did not buy a home they could not afford - heck, they have managed for the last three years to pay for two homes they could afford. All credit cards have been paid off every month for the past decade. Through it all they have become jaded to declining platinum card offers and HELOC's when the media was telling everyone they were a thing of the past.
Now clouds are gathering on their horizon. The idea of a strategic default on the home left behind becomes a consideration ... because its FMV is now 50% of what it was three years ago and still falling.
The next year should tell the tale of whether the foundations of this next economic tier withstand the continuing aftershocks in the global economy ... or disintegrate and topple others with them.
barliman
I kinda enjoy using the term obama rich for that category because people that fall into that category have just enough money to be lumped in with the upperclass but not enough money to really control things.
Yes, and you could lump in the inner-Beltway crowd and the East Coast bubble and the West Coast fairyland.
So many regional areas and families and groups of people that have NO IDEA how their fantasy world is teetering on the brink of collapse. Yikes.
Very few people ever see the collapse prior to it coming. They think everything will continue to move forward. Dot com, housing, etc... all take most people by surprise. The current bond bubble (stock market bubble) will end badly with most "experts" stunned by the unforeseen turn of events. The predictors of collapse can pat themselves on the back (see Peter Schiff was Right v.1 and v.2 on youtube), while the majority shake their heads muttering "I never thought that ....."
QE1 to infinity is not the philosophers stone, printing your way to prosparity will work only temporarly due to the dollar's reserve currency status (backed by the US military). When the rest of the world decides to cut up our collective credit card, we will have our "oh shit" moment. The big question is not if, it is still when?
Beyond that, white-bread bill paying middle class Americans are losing the ability to pay the bills, no matter their intent or desire.
Wages = stagnant
Healthcare costs, fees, taxes, food, necessities = +20%-25%
We are living the same reality as the rest of the world except we don't go hungry first; first we lose disposable income, then hit the credit cards, then default, then wait a year or two to lose house, then go on food stamps and unemployment, THEN we might go hungry if the food bank is empty.
For the biggest economy in the world it is a much bigger house of cards than anyone would like to admit.
In the minds of the elites and non-affected these are the "losers" but that 10% of the population needs to WAKE UP; it is your relatives, your neighbors, your community. Quit dreaming and get off the KOOLAID assholes, the shit is hitting the fan!
Milton Bradley has a new board game coming out soon:
Hungry Hungry Everyone
Amazing what $2 trillion and the future of generations can buy, eh?
It bought us 17% unemployment. Yippee.
You are off by a few orders of magnitude in your calculations.
Even if QE does not work the effective cost is at most in the tens of billions range - chump change for a big economy like the US that produces $15 trillions per year. (Remember the yield curve I linked to? You can do the calculations based on that.)
If QE works it's priceless, as it has softened the depression, of course.
Really, you clearly have absolutely no idea what you are talking about. You are just upset at something ... anything, but you don't really know what it is or how it really works.
Clearly you think that you're still working at the rent-to-own store and we're all chumps that need to be talked into that 50$ a week couch.
The first tool of the delusional...debasement of personality versus facts. What facutal basis do you have to argue that $14 trillion in debt can be addressed a GDP of $15 trillion a year? (and no, the $1 trillion a year "surpluse" never makes it to the government because the debt payments exceed the surplus).
All data suggests that the public debt of the US is clearly servicable and in fact the deficit has been reduced in the past - it has even been reversed for a few quarters and turned into an actual surplus. See this data of the deficit from 10 short years ago:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CD...
Absolute debt levels reversing at the end of the Clinton presidency:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?bgcolor=%23B3CD...
That reduction was not continued during the Bush presidency though.
Other historic data shows that the USG has recovered from much higher GDP-to-debt proportions in the past than the ~100% today.
For example the US had 300% of debt-to-GDP ratio in the early 30s:
http://www.princeton.edu/~pkrugman/debtdepressionwar.PNG
Reducing debt is possible - even 300% is recoverable, it is a matter of political will.
Not 300% but 30%! The scale on the graph you cited is for total debt.
No, you saw that right, peak debt is actually really at 300% of the starting level of GDP. The blue line is total debt, public plus private, in billions of dollars; the red line debt as a percentage of GDP (both on left scale).
A deep slump looks scary as the debt ratio skyrockets, doesn't it? That's partly why Roosevelt faced so much opposition and that is why he himself wasn't really sure how to size the New Deal (in hindsight he under-sized it).
It's just as scary as the "future debt in percentage of today's GDP" graphs people are projecting these days.
It looked scary when it happened but (in hindsight ...) it wasn't an unmanageable situation, because the debt was out-grown. Yesterday's debt turned out to be in part a sound investment into the future.
Will that always be true? Arguably that's not granted, at all.
NOTE: I think there's two details about the graph which might create confusion:
- it's not just federal debut but private debt included as well.
- the graph uses the initial GDP level, not the in-hindsight yearly GDP-relative level.
This graph shows a "projection" - how debt looks like to policymakers who are looking at the debt trajectory at any given moment, trying to see what will happen in the next few years.
And I was wrong to equate this 300% figure above to the current 100% public-to-GDP figure - that's bogus, apples to oranges. A better comparison would be the 1946 150% public-debt-to-GDP figure.
Ah, the devil's in the details.
I found Krugman's article with the graph -
http://krugman.blogs.nytimes.com/2010/09/03/paradoxes-of-deleveraging-and-releveraging/ He is using both public and private debt.
I think a more fair comparison would be to take todays public/private debt number and compare that to todays GDP. So $54T public debt, and $14T GDP, Oh snap, our total debt to GDP is 387%. Without those pesky off balance sheet programs that didn't exist in 1930. Party on.
Debt number from http://www.marketoracle.co.uk/Article14749.html
My question to you is how much of the debt of the 1930 debt was paid back, and how much was defaulted on?
Yes, you are right - I was wrong to compare apples to oranges.
The right comparison would be the one you mentioned, or the 150% public-debt to GDP ratio of 1946.
To More Critical:
Thanks for your comments. I see you have a lot of opinions about economics and the data. It is difficult to respond to your many comments. But to start with the first one, I find that you, like many critics of Austrian theory, including Professor Krugman, don't know what the theory is and criticize it based on what you have heard other people say about. And those folks don't have a clue either. So, I don't think I'm ranting in my article and I don't think I'm delusional. Perhaps when you calm down from all those steroids you are taking we could have a reasonable conversation. BTW, you conflate Austrian and Monetarism which are quite different. As to liquidity, if all those policies had worked (ZIRP and QE) why are they still doing it? In fact those policies haven't worked and liquidity as evidenced by bank loans is very tight. My point is that printing money doesn't create liquidity and the facts bear me out. It is a complex topic for sure. Perhaps another time, MC.
The fact that FDR insisted on ANY Government intervention was his fatal mistake. FDR would be hated without his bold propaganda machine and his connections to the academic community to make sure history slanted to his favor. The depression didn't get really bad until the New Deal.
Keynesian command and control has been the order of the day because it keeps the reins in the hands of the Banks and the Government, despite the fact that most of it's macro-economic strategies have been discredited throughout modern history.
You need to go read Henry Morgenthau's speech to the Congress in 1939. This guy was FDR's Treasury Secretary and his very close personal friend. Yet, he stated in 1939 that spending money was NOT the right way to bring the economy back. Read it.
Immediate and FULL funding of everything is the only possible way to prop up an economy without a healthy free market. It's called Communism. There is no country that can afford fully subsidize a massive country like ours, it will go bankrupt trying. Huh... sound familliar?
We MUST remove the uncertainty of the fickle, pernicious, government intervention. It is the only way to re-light the fires of the economy. Our Federal Government is supposed to provide a stable platform for the free market to work, not play in the game. Unfortunately, no matter who Obama happens to be channeling on any particular day, he ACTS like a combination of Woodrow Wilson and FDR. These guys were so convinced of their intellectual superiority, that they believed that they could rewrite reality to fit their theories, and ultimately they all failed, including Obama. Unless, of course, wrecking the country actually IS your motive.
Get used to the idea of lowering your standard of living, folks. This one is going to make the Great Depression look small...
Yet just one short year later Roosevelt started the biggest spending program of USG history (at that time), and the economy catapulted upwards.
In any case, it was clearly controversial in those times - it was much more controversial than today - because government spending was so unconventional.
People almost revolted over the introduction of Social Security.
Today people would surely revolt if someone tried to eliminate Medicare: the ultimate government financed universal insurance program ...
So yes, times have changed.
Ahhhh... a matter of "political will..."
And therein lies your problem.
I think u are Krugman....
No, probably just just a Soros globalist minion. Or, one of the more vocal of the Keynesian Kool-Aid drinkers, convinced that somehow we can just keep building an unsupported bridge out over a chasm by printing and monetizing.
The truth of the damage will be apparent soon enough. I know plenty of people who are still happy to admire the plaster job that the Fed, Treasury, and globalist megalomaniacs have slapped all over the the facade of our country and it's economy. The clock is ticking...
"Reality is NOT optional" ~Thomas Sowell
The suggestion is flattering (to me).
I disagree with Krugman in several areas (he doesn't really care, nor do you): for example I think he's far too soft on the financial industry's near-criminal and outright-criminal shenanigans.
Generally IMO he's a pretty smart guy and writes compact and robust analyses and graphs, which makes it easy to link to.
Pump It Up!
...until you can't feel it....
Pump it Up!
...when you don't really need it...
http://www.youtube.com/watch?v=tpprOGsLWUo
.
LOL - this idiotic claim is one of those mind-boggling Austrian/monetarist delusions.
Why should the GDP effects of QE be "not real"? A quick thought experiment: did you accept GDP upticks after Greenspan's Federal Funds rate cuts during the Clinton or Bush presidencies as "real"? If yes then there's no reason to call QE "not real" - because the two are essentially one and the same thing: they increase bank liquidity. [*]
The only "maybe" about QE was whether it would trickle over into the real economy. But once it has worked, once the GDP uptick was there, it was as real as it gets.
But yeah, just continue ranting the "increasing liquidity is never the solution" Austrian mantra and continue shorting the S&P. You might as well keep denying that the earth is flat or that that the climate is warming or that evolution is the mechanism along which life progresses.
[*] The difference is that while regular rate cuts increase liquidity by enticing banks to create more money (take up more liabilities), QE increases liquidity by enticing banks to move themselves and their customers from bonds into the money market, via POMOs. But once the moneys were created the two are indistinguishable. Or do you believe dollars have "QE related" printed on them? :-)
@ more critical thought
Clearly, you need to learn some macroeconomics. I am willing to take on the job, so here comes a few lessons-questions for you before you preach again:
1. One main reason that the GDP effects of QE may be considered "unreal" is that QE has to be reversed. Got any suggestions for exit policy? Maybe you could advise to the Bernank because as far he is concerned, his suggestions are
a)Increase the interest rates on bank reserves
b)Reverse repo agreements (in which the banks have clearly shown no interest)
c)Raise the Federal Funds Rate
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
What do you think will happen to the GDP when any of these policies is implemented? What would your real GDP gains be then?
2. Yes, of course QE trickles down to the real economy, it would be very surprising if it had not. The real question though is simple: What percentage of the claimed increase in personal consumption is coming from different income groups in U.S? How much did personal spending increase for the lowest 20%? Second lowest 20%? Top 20%? What are the inflation rates faced by each group? What happened to real income in each group? What is the magnitude of the wealth effect due to increases in the stock market? There was an excellent piece here a couple of months ago on the amount of personal income spent on food and energy by the average American? Bothered to read that?
3. Have you ever heard that the inflationary effect of monetary policy appears on the average in 18 months? Therefore, printing money would not immediately lead to inflation, whereas it will immediately lead to an increase in personal spending, as this additional liquidity is pumped into stock markets, bankers salaries and the associated demand increase? Do you want to add 18 months to May 2009 (roughly the beginning of QE all over the world), and compare it with the timing of the surge in global food prices and the riots that have followed? What do you think will happen to real income when the global prices increase even more and the dollar depreciates?
4. Do you know anything about the revolving and non-revolving credit figures in the U.S? Do you know that both are on the decline since QE has started? How will you justify your argument that QE increases lending?
5. What is the logic of buying U.S bonds and reducing the interest rates apart from a short term unsustainable solution to the unpayable debt of the U.S government? How will the U.S government be able to finance over 100% debt/gdp when the rates start going up? Do you see any prospects of a budget surplus and/or lower financing costs for the U.S government in near future? What is the benefit of this stupid policy in the medium run then?
6.It seems that you have no idea about cause and effect. QE will not work because bond yields are low, BOND YIELDS ARE LOW BECAUSE OF QE! That was exactly what the Bernank wanted. Print, reduce the interest rates on bonds, so the government takes a breath in the short run and the banks lend the money to customers. Instead, the banks are speculating on anything and everything possible. If the solution to debt problems were so easy, then why has every country that has attempted it ended up in ridiculous levels of inflation?
7. An economist does not only talk about the current effects of policies, but also the implications of them in the future. That is called sustainability if you have never heard of the term before. So here is the real question to you: Is the increase in GDP sustainable?
p.s I am not an Austrian economist, and I remember you owe Tyler-ZH an apology for mocking his post on the stupid ADP number released last month. Have you done that yet?
You seem to be confused about what the Fed wants.
The Fed wants to avoid deflation.
The way to avoid deflation is to ... introduce inflation expectations, to steepen the yield curve. How do you do that? Normally it's done by cuttig the Federal Funds rate - but that's not possible now as it's already at zero.
[ Note, theoretically it's possible to have negative rates, as Sweden has done it - but that assumes the Fed controls all cash. It does not do that in the US as there's a huge shadow banking money market which would merrily ignore negative rates or would flow abroad. It could only be controlled via captivity capital controls in essence ... which is a big political no-no. ]
Cutting the short-term rates further is tricky but can be done: you can do it by buying mid-length (3-5 year) bonds and lowering their yield and shortening the average maturity of government debt.
That has the side-effect of sucking demand from the 10Y bonds and lowering their price - increasing the 10Y yield. The other effect is that it further lowers the ultra-short-term yield - to effective negative territory:
Should the Fed decide to drain this liquidity not via maturity but via future sell side POMOs, the expectation of that drops current short-term prices to effectively-negative territory (everyone wants to get rid of it before the Fed).
Not confused yet? Then you haven't been reading carefully enough :-)
So far it appears to have worked, here's the US 10Y yield:
http://www.marketwatch.com/investing/index/TNX/charts
See how since QE2 kicked in there's been a rise?
And yes, I'd agree that this is a bit of a 'tail wags the dog' excercise.
There's no precedent of whether there's a binding coupling this way around - we know that growth expectations raise the 10Y yield - but does a rising 10Y yield (and in particular, a steeper bond curve) create growth expectations? It feels unnaturally mechanic and so far the answer is a 'maybe'. We'll see.
The NFP data two days after the ADP data largely confirmed the ADP data, especially if you consider that last month's NFP data was revised upwards.
Want me to link to those numbers?
Also note what I mocked: I mocked the assymetry of the reporting: all ADP data drops were reported as huge negative news, upticks were downplayed or ridiculed.
Actually, I never said that QE would increase lending - it would not increase lending - at least not immediately.
The Fed has no direct influence on bank liabilities - and if banks do not see upcoming growth then no matter what the Fed does, lending to the real economy does not increase - like in Japan.
What QE achieved/achieves was/is something different: it forced/forces banks and corporations out of bonds, where most of the excess liquidity was parked. US corporations had about a trillion dollars in savings - most of them in bonds.
Sure, inflation lags by a few quarters - but you talk about inflation as if it was something bad here. Reality is that the Fed was worried about deflation (and was IMO worried about deflation rightfully), so inflation, right now or in three quarters is considered a distinct success.
Well, as an economist did you know that the only prior precedent of a central bank performing QE resulted in that QE effort not trickling down to the real economy, in Japan's 1998 failed QE effort which was comparatively larger than the Fed QE?
So whether liquidity would leave the banks was an open question (the Fed has no power over that and in Japan most of the excess liquidity did not leave banks) - and it was questioned very loudly here on ZH.
(and it was questioned rightfully - this was an element of uncertainty.)
Erm, have you considered the very simple solution to "simply wait"?
These are US treasuries for heaven's sake, with mid-range maturity. They have a principal amount that the USG pays back on maturity, in the regular course of bond rollover. In that sense they are self-sterilizing, no need to "exit" on the open market nor do I think the Fed has any intention to do so.
@More
"Why should the GDP effects of QE be 'not real'? "
Even a simple mind understands the real basis of wealth involves assets net of liabilities.
Exactly.
That is why the 3.2% uptick in GDP gives an about half a trillion in increase for the US economy as a whole, per year. That's $1670 per person, per year.
Consider, on the other side, the at most tens of billions expensive QE2 effort - which might sound large but is about $100 per person - and it is a one time expense.
Which one is the bigger one in your opinion?
@More
The national "balance sheet" shows different, rather disturbing numbers, numbers we're told to ignore in the present because they are part of a Keynesian master plan. You claim Bernanke's QE is a low-cost success story, fine, then let's expand on this good idea and make it five times larger. Will our GDP "growth" start to resemble what China reports?
You know the answer. We are experiencing the classic "crack up boom" predicted by those dour Austrians.
Which numbers would that be, specifically?