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St. Louis Fed Stunner: Admits QE May Lead To Rise Rather Than Drop In Unemployment
It's one thing for bloggers and even various non-mainstream economists to charge the Fed with pandering exclusively to Wall Street's interests, and accuse Ben Bernanke of hypocrisy when he says that the Fed's ultimate goal is the strengthening of the economy through a decrease in unemployment (recall that one of the original two mandates of the Fed is "maximum employment"... that is until it was supplanted by the third and only one: "Russell 2000 to 2000") and caring for "lower-income households." It is something far more serious when the one doing the accusing is... the Federal Reserve. In a seminal paper which we are convinced will make the rounds the next time the puppetmaster is undergoing his periodic grilling by Congressional and Senate critters, Yi Wen of the St. Louis Fed indicates that the entire experiment in increasing the adjusted monetary base by $2 trillion in 2 years is not only not benefiting the economy, but is in fact having an adverse impact on such key economic drivers as unemployment. To wit: "permanent increases in the monetary base foreshadow eventual increases in inflation that can increase, rather than reduce, unemployment over the long term." We wonder if Bernanke knew in advance that LSAP (aka QE2) had a statistically greater chance of resulting in greater unemployment, and thus more pain for the working class, and if the only offset, a doubling in the stock market when ever more capital is diverted from organic economic growth to pursuing speculative risk, was important enough for the Fed to effective replace its employment mandate with one of stock market manipulation?
Here is how the St. Louis Fed confirms that the Chairman is nothing but a puppet in the hands of Wall Street:
The impact of LSAP programs on economic activity depends on the programs’ effects on longer-term interest rates and the responsiveness of aggregate demand to such changes. The St. Louis-based consulting and forecasting firm Macroeconomic Advisers recently estimated that the Federal Open Market Committee’s current $600 billion LSAP program likely will reduce the 10-year Treasury yield by 20 basis points, increase the eight-quarter-ahead level of real gross domestic product by 0.4 percentage points, reduce the unemployment rate by 0.2 percentage points, and increase employment by 350,000 jobs. Although analyses conducted by other institutions (such as the Boston and San Francisco Feds) have suggested slightly higher figures, the overall effect of the LSAP programs on unemployment is modest.
A less-recognized risk in LSAP programs is that permanent increases in the monetary base foreshadow eventual increases in inflation that can increase, rather than reduce, unemployment over the long term. David Ranson of Wainwright Economics has analyzed the U.S. data over the period of 1950 through 2007. Ranson divided the 57-year period into two categories: years when the monetary base grew at an above-average rate (8.1 percent) and years when it grew at a below-average rate (3.5 percent).
And the stunners:
Ironically, economic growth was higher in the years of slow money growth (3.7 percent) than it was in the years of rapid growth (3.2 percent). The same was true for industrial production. Meanwhile, the consumer price index rose 5.1 percent in years of above-average monetary growth and just 2.6 per- cent in below-average years.
It is, in fact, as we have always expected: QE not only does not result in relative economic outperformence (the opposite), it simply leads to higher inflation, and subdued economic growth. And the Chairman of the Federal Reserve was not aware of this data?
And while this too is more than obvious, anyone could have foreseen the impact QE/LSAP would have on precious metals:
The gold price showed an even bigger differential, rising 12.5 percent in above-average years and just 0.6 percent in below-average years.
Perhaps the above explains why we have been bullish on the precious metals complex since March 18, 2009 (official start of QE1). Alternatively it may just be our long-running bet that Bernanke will fail in his attempt at instituting central planning effectively, and the outcome will be the end of the monetary system in its current iteration.
And before skeptics accuse the St Louis Fed, which has sometimes been defined as hawkish (although we have yet to see James Bullard vote in the "against" column during an FOMC decision), this is a finding that has been replicated elsewhere on not just one occasion.
Other recent analyses, using different tools, have reached similar conclusions. In my current research, I have esti- mated models for the period 1948:Q1 to 2008:Q2 that sug- gest that a sustained increase of 1 percentage point in the growth rate of the monetary base has almost no impact on unemployment during the initial 20 quarters but can significantly increase the unemployment rate in the longer run (say, during the subsequent 20 quarters). Extrapolated to the very long run, my analysis suggests that a sustained 1-percent-per-year faster growth of the monetary base might increase the unemployment rate by between 1.0 and 2.2 percentage points. The reason is that expected long-term inflation is bad for growth and employment.
A recent article in the American Economic Review docu- mented a similar positive relationship between longer-term inflation and the unemployment rate (Berentsen, Menzio, and Wright, 2011). These authors use a search-and-matching model to explain why longer-term inflation can increase, rather than decrease, the unemployment rate. That is, inflation reduces the demand for money and, hence, hinders trade and the probability of matches in both the goods and labor markets.
The conclusion is obvious:
In summary, the near-term effects of LSAP programs on unemployment remain uncertain. Further, caution must be exercised such that long-term inflation does not increase. More and more economic research suggests that the long- run costs of inflation, measured in welfare terms, are likely higher than previously estimated (see Wen, 2010). Fortunately, at least one recent cross-country study (Anderson, Gascon, and Liu, 2010) suggests that this long-run lesson is well understood by policymakers.
Alas, unfortunately, the author is wrong. Policymakers, neither of the fiscal nor monetary variety have any care for what the long-term costs of inflation are for the general population. The only determinant is how far is the S&P has risen in any given electoral cycle. After all it is so much easier to manipulate the stock market than the economy. Which is why Bernanke is nothing more than an enabler of market manipulative political posturing... and Wall Street greed naturally: the one certain side effect of the R2K@2K is another year of record bonuses on Wall Street.
h/t Nolsgrad
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It is a sad event indeed that a republican president makes me nostalgic for the old whore dog in chief.
did you see where the moQ, after invading tunisia and sending in soldiers who are now flirting with tunisian nurses in tunisian hospitals, threatened to blow up any freaking ship that came near his coast w/out his ok?
now, they have struck at moQ's family, but may have missed him.
Hey Dr. Krugman, Dr. Dilorenzo is waiting for your apology. Or perhaps you can call the economists in the st Louis fed racists for saying exactly what the witnesses at Ron Paul first monetary subcommittee meeting explored.
What a fucking joke
Well now.....
Anybody ask at what cost ....
Does it make sense to create jobs that cost far more than they produce....
.......................
Basic math nullifies the validity of politico economics...
Utterly insane......
....................
What has to be addressed...but will not be .....
Is that government has to shrink dramatically ....in terms of its auto add back costs....and labor has to work for less.....
This coupled with a modest decline in currency valuation....will be more of a true resolve to making the US competitive with BRIC....otherwise the polyeconomics just equals hollywood economics....which equals CRAP ECON 101.....
You mean like that FAB 8 plant Global Foundries is building in New York. Where the state gave them like a bunch of billions of dollars and it created 1400 jobs or about 1 million 800thou per job. It's like these people running states never heard of a return on investment.
"...confirms that the Chairman is nothing but a puppet in the hands of Wall Street".
Hmm, probably explains his trembling voice the other day - he knows it's crap, we know it's crap but the big boys "want" him to say what he's saying.
Off track, I've been going down into the rabbit hole of Barry's birth certificate and social security number mysteries today. If there's any truth in them I can only say "Phew".
DavidC
QE2 was too small. Everyone said it when it was announced. Now we see the results. Our fiat failed fractional reserve fiat banking system on 100 to 1 leverage can only be sustained with more money injections OR fixed with massive reforms. And since we won't get any reforms, keeping the system alive requires more money. We half assed QE2.
Before you junk or flame this, I am merely pointing out that we are playing a broken monopoly game by the rules we have created. Within this system there is only one answer. It does lead to a devalued dollar. But a system that allows banks to bet more money than exists, lose, and accept printed money bailouts to cover their losses with no penalty, does not work if you don't completely bail them out but also allow them to live. So I say QE was too small and did not target enough of the correct assets.
For those of us that live in the "real" world, we know that things have gotten worse. Yet the FED and Wall Street laugh in our faces as the FED keeps printing and Wall Street gets richer. All of this on our backs. Like most Americans are just trying to survive. Keep our Jobs, put food on the table, raise our children. So, we now do not have to just survive, we have to pay off the Debt that was created to bail out Wall Street. But, who will bail us out?
Why has all of the 2 Trillion or so that the FED has created to stimulate the Economy only gone to Wall Street. What has it done for the other 99% of Americans? The only thing it has done for us is to send more of our Jobs Overseas, make our situation even worse by raising the price of food, gas, heating oil, clothes, etc. Plus, we get to pay higher taxes for all of the Debt Created that was given to someone else.
Sigh!
The system allows the high rollers at the table to take for granted that they will ALWAYS be bankrolled by the average American. The power players play the game for our lives and we cover their losses and pay for their failed experiments. At the table are those with their hands on all of the levers of our control, so they are nearly invincible. It's a good game for them - interesting with lots of nice perks. They won't give it up until enough of us "slugs" realize that just trying to survive is not enough and we convince many more to stop funding their games.
I understand some concern about all this QEasing, but sometimes you have go through a bit of discomfort on the way to the cure. Everything will be resolved after we devalue the USD another 90%.
Once oil is $1200/bbl, all kinds of labor-intensive work will come back into fashion, and we'll be at full-employment in no time.
Whether this is sarcasm or not does not matter, as this WILL be our trajectory.
At some point $$ and oil will be meaningless.
Whether this is sarcasm or not does not matter...
I like the way you think. Our feelings have really never mattered on any of this. ;)
From Your Biflationary News Desk:
Hello everybody, this is your action news reporter
With all the news that is news across the nation
On the scene at the St Louis Fed with Yi Wen, author of a revolutionary new study of the effects of QE. Mr Wen can you tell us your findings:
Yeh I can. It turns out you can spend more and buy less. It turns out you can think you're richer but really be poorer. And the stunner is that you can think you're running faster and just be running in place in a hamster mill.-
These stunning developments are only just now coming out of top secret research conducted in a basement lab at the St Louis Fed. Among the shocking discoveries were:
-Prices can rise while demand simultaneously shrinks under the right set of conditions such as extreme monetary stimulus into a deflationary depression without appropriate restructuring of the economy.
-There are actually two different economies with very little overlap : the Main Street economy (aka the engine of growth) and the Wall Street economy. One was supposed to function as an enabler of the growth of the other, but eventually became a parasite and actually stunted the growth of the other once it became unmoored from growth in the general economy and the laws of supply and demand thanks to special programs from the central bank.
-And research revealed yet another incredible surprise: the rich get richer.
We wonder if Bernanke knew in advance that LSAP (aka QE2) had a statistically greater chance of resulting in greater unemployment, and thus more pain for the working class, and if the only offset, a doubling in the stock market when ever more capital is diverted from organic economic growth to pursuing speculative risk, was important enough for the Fed to effective replace its employment mandate with one of stock market manipulation?
STOP putting "GROWTH" in there unless you want to be confronted with questions about the feasibility of perpetuating growth on a finite planet. Tossing in "organic" is an attempt to make this absurd statement wash- it doesn't.
Now, if you'd have stated it as "when ever more capital is diverted from productive economic activities to pursuing speculative risk"
The use of "speculative risk" is also a bit questionable, given that that's the whole point of markets to begin with- one is speculating on an outcome! If you inject a negative connotation on this then that means ALL markets are a negative thing.
We all kow that QE@ had/has 2 goals:
1. Money to the banks.
2. Someone has to buy that $140B of monthly new USG debt plus maybe double that rolling over. It was obvious last summer that the Chinese weren't going to keep doing it forever, and at interest rates so low the domestic market was shrinking. If not for the Fed covering for it the utter insanity of Federal finances would have been more apparent to the masses months ago, and govt interest costs would have soared. Since the govt is incapable of living within its means...
All the talk about helping the economy and jobs and all was just BS for the naive (e.g., media).
It should be quite common that GROWTH itself is the Ponzi. Picking on any entity engaged in such practice is playing favorites/infavorites.
The govt's MEANS IS to cater to the revolving door group ("servants" to TPTB).
The "masses" will never get it. They have been programmed to target the scapegoats as designated by TPTB.
What will it be, Mad Max or Logan's Run?
Some very good commentary here.... Well done, everyone.
I would like to see comparative analysis of varying trade barriers. Big question: given as true US workers will have to work for less, is this because trade policies favor other nations, or are markets truly open so we compare labor apples with labor apples? Anyone?
Everything (through this point in time) is under primary influence/control of US "decision-makers." Their conundrum is whether to cater to business interests operating abroad OR the citizenry. Given the increasing expenditures on "security" I'd tend to give the nod toward the former being the winner.
Law of averages. 2/3 of the world's population lives on $3/day or less. And with cheap energy running out, and with reverse economies of scale starting to kick in, things ain't looking good for the common worker in the US...
A cab driver last night just asked me about silver. Where is Cog Dis when you need him?
Amazing, but no surprise to ZH readers!
Tyler, perfect assessment, as usual. This one sentence summed it all up well.
''Policymaker, neighther of the fiscal or monitary variety have any "CARE'' for what the long-term costs of inflation are for the general populations.''
...CARE!!! CARE!!! CARE??? I'm no ''Texas Gunslinger'' but, what the hell??? These people are evil, no matter what your version of evil is, these ''fools'' given power declare it themselves, as you just perfectly pointed out. They have a ''Cremation of ''CARE'' ritual sacrifice for a reason http://www.youtube.com/watch?v=rAwqvjqAfkQ and they burn a child on a flaming alter for a reason. The reason for why people don't ''CARE'', the reason why people claim not to be their brothers keeper, the reason why the Fed Heads in one breath slaughter labor and then in the next breath bluntly declare it through the monitary system they have control over is ....BECAUSE THEY ARE ''EVIL'' AND THEY DON'T CARE. Pretty freaking obvious. So what do you do when children are being ritually slaughterd by evil bastards that do not CARE and the general populations don't care to stop being slaughtered? http://bible.cc/leviticus/20-5.htm
http://www.youtube.com/watch?v=nGHhqV_QhzE&feature=related
Judgment shall come upon all the nations because all have accepted the mark of the Federal Reserve debt note, and all have been given strong delusion for having done so. The Truth is not a choice, yet the nations and tongues knew that they were sacrificing Truth and claiming dominion. Now it's time to realize just what a bottomless pit of hell is, for the last time. Watch!!! Stand fast and do no harm, or your shit will be in the whirlwind troop. END THE FED or DIE!!!. ...and Judas Priest don't be a lukewarm pussy, if you are gonna die, die with your boots on. http://www.youtube.com/watch?v=cFnpCVyTJXQ
This thing was marked for FAILURE from the time the clock started clicking. All we've ever done is to play for time...
More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.- Woody AllenInflation leads to higher unemployment? Who woulda thunk it?
No feeding the trolls.....
Fuck off,you sach of shit,Ya you Texas fucking dumb,gunslinger.
Perhaps I have mis-remembered hearing The Bernan say a while ago that he would run QE(n+1) until employment improves to some arbitrary level. If so, why would any big money interest want to hire anyone and cut off their ZIRP? A step further, the recipients of the free money supply would have the incentive to put pressure on corporations that they are invested in to lay people off...
IDK - been a long month, brain drained, body falling apart, just about lived my usefulness... LOL
These historians confuse cause & effect. The science is revealed via the growth rates of Commercial & Reserve Bank credit relative to the growth rates for the financial intermediaries (non-banks).
I.e., the attraction of savings from the intermediaries (intermediaries between savers & borrowers), decreases the supply of loan-funds & forces rates higher than otherwise.
The mix is compounded because the CBs (as a system), do not loan out existing deposits (saved or otherwise). they are simply custodians of stagnant money. I.e., savings are impounded within the CB system. They cannot be spent by the CBs, they can only be spent by their owners...
Some awsome comments here by people who do understand what is happening. Thank you all and thanks especially to Tyler for providing this site. I have read it for a year and have learned so much.
@Texas: Stop commenting. You have nothing to contribute. What you see is not evil and hate between the posters; it's just harmless banter. They hate the system which is destroying us all.
@ the pornographic posters: you only show that you lack the intelligence to express your ideas in a more civilized way.
1964 Summary by Dr. Leland Pritchard Ph.D., Chicago 1933, M.S. Statistics, Syracuse:
THE SAVINGS-INVESTMENT PROCESS OF THE COMMERCIAL BANKS CONTRASTED TO THAT OF FINANCIAL INTERMEDIARIES:
(A) The commercial banks create new money (in the form of demand deposits) when making loans to, or buying securities from the non-bank public; whereas lending by financial intermediaries simply activates existing money.
(B) Bank lending expands the volume of money & directly affects the velocity of money, while intermediary lending directly affects only the velocity.
(C) The lending capacity of the commercial banks is determined by monetary policy, not the savings practices of the public.
(D) The lending capacity of financial intermediaries is almost exclusively dependent on the volume of monetary savings placed at their disposal. The commercial banks, on the other hand, could continue to lend if the public should cease to save altogether.
(E) Financial intermediaries lend existing money which has been saved, and all of these savings originate outside the intermediaries; whereas the commercial banks lend no existing deposits or savings: they always, create new money in the lending & investing process.
(F) Whereas monetary savings received by financial intermediaries originate outside the intermediaries, monetary savings held in the commercial banks (time deposits & the saved portion of demand deposits) originate, with immaterial exceptions, within the commercial banking system. That is demand deposits constitute almost the exclusive net source of item deposits.
(G) The financial intermediaries can lend no more (and in practice they lend less) than the volume of savings placed at their disposal; whereas the commercial banks, as a system, can bank loans (if monetary policy permits & the opportunity is present) which amount to several times the initial excess reserves held.
(H) Monetary savings are never transferred from the commercial banks to the intermediaries; rather are monetary savings always transferred through the intermediaries. The funds do not leave the banking system.
(I) If time deposit banking is to add to the aggregate profits of commercial l banks as a system, it is necessary to assume that the expansion of time deposits per se induces the Federal Reserve to alter monetary policy toward greater ease (or less restraint) to the extent necessary to supply the banking system with an added volume of excess reserves adequate enough to enable the banks to expand their earning assets, & thereby their net earnings, by an amount sufficient to more than offset the overall increase in costs associated with the growth of time deposits.
(J) The growth of time deposits in commercial banks denies savings to intermediaries, reduces lending opportunities for all institutions (including the commercial banks), and slows down the tempo of business activity; since in their time deposit function, the commercial banks are neither intermediaries nor creators of loan-funds but are simply custodians of stagnant money
(K) The growth of financial intermediaries has no effect per se on the aggregate assets, earnings assets, gross income, or net profits of the commercial banks as a system; but their growth does activate monetary savings and tends, therefore, to increase the lending opportunities of the commercial banks. The growth of financial intermediaries should, therefore, enhance commercial bank earnings & profits, if the Federal Reserve permits the commercial banking system to exploit their expanded lending opportunities.