Why Quantitative Easing And Fiscal Stimulus Are Unnecessary

Econophile's picture

This article originally appeared in The Daily Capitalist.

"Believe what your eyes see, not what you want to believe." 


In my article "Something Is Happening" I noted a glimmer of positive economic data. I was cautious to not call it a "recovery" yet because there isn't a clear trend. In addition there is some uncertainty about policies of the Fed and the federal government that may well thwart the recovery. But I can't ignore positive signs. I read the same data as other free market oriented blogs out there, I am just about the only one seeing this. As I reported in "Something Is Happening," economies repair themselves, absent government intervention in the process,.

I believe because of the massive debt buildup during the crack-up boom, that the bust will be much longer than the average recession. At some point, though, banks start to clear out bad debt, especially CRE, residential foreclosures increase until the market absorbs overbuilt housing, and consumers cut back spending, pay down debt, and boost their savings. All these things are occurring now, especially, the CRE problems of banks which is the main problem of local and regional lenders who provide much of the credit to middle and small American businesses.

The government's response to this crisis has been almost entirely wrong and has served to only delay the recovery by thwarting the liquidation process and reallocation of capital from bad deals to profitable ones. Mark-to-make-believe, extend-and-pretend, bailouts, incentives for failing businesses and the housing market, fiscal stimulus, money pumping by the Fed, and other projects have been their main tools and they have all failed. They have only created more uncertainty for small(er) businesses who are reluctant to expand and borrow ("regime uncertainty").

But now, they have run out of money. The end of tax supports for housing or cars and mark-to-make believe for banks and the wind down of massive spending on wasteful projects or bailouts is finally allowing businesses and banks to emerge from the crash. The ineffective fiscal stimulus is pretty well flushed through the system. Yesterday's construction report from the Census Bureau shows that overall construction gained only 0.8% in October, and of that gain, the public construction portion was up only 0.4% (i.e., negligible). None of their efforts have had any lasting impact on the economy. Any recovery is due solely to the factors mentioned above.

I wouldn't go as far to say that the government won't still muck things up, they will, but I believe their tools have diminished. I also believe that "recovery" is more likely to look like stagflation than strong growth, which is another topic.

So along the lines of "Something Is Happening," including some of the positive data I reported yesterday, today' reports from ADP on employment is still encouraging, and productivity and manufacturing are improving, but I'm not jumping for joy. The Challenger Job Cut report was up significantly.

Here is the data.


Manufacturing activity continued to expand in November, according to the Institute of Supply Management, but the pace of growth slowed a bit. Separately, U.S. productivity rose more than previously thought in the third quarter as companies boosted output while also holding down labor costs.

The ISM's manufacturing purchasing managers' index slipped to 56.6 in November from 56.9 in October. Readings above 50 indicate expanding activity. Economists surveyed by Dow Jones Newswires had expected the November index to remain at 56.9.

Productivity for Q3

Nonfarm business productivity rose at a 2.3% annual rate in the July to September period, the Labor Department said Wednesday, compared with an earlier estimate of 1.9%.


Despite the rise, the sharp gains in productivity growth seen in 2009, ranging from 3.4% to 8.4%, may be over. Productivity usually picks up sharply at the end of recessions as companies increase output but hold back on hiring. The economy started to grow again in the third quarter of 2009 following the worst recession since the 1930s, though the pace of recovery, and hiring, has remained weak.

U.S. productivity fell 1.8% in the second quarter.


Wednesday's report also showed that unit labor costs--a key gauge of where prices are heading -- fell at a 0.1% annual rate last quarter, unchanged from the Labor Department's preliminary estimate.


Unit labor costs rose 4.9% in the second quarter, compared with a preliminary estimate of 1.3%, due to a sharp revision in hourly compensation. But over the past four quarters unit labor costs have fallen 1.1%, the Labor Department said.

Economists had forecast a 0.3% third-quarter drop.


Nonfarm business output rose 3.7% during the third quarter, at an annual rate. That compared to the Labor Department's earlier estimate of a 3.0% rise and a 1.6% increase in the second quarter.


Hours worked ticked up by 1.4%, compared with an earlier estimate of 1.1% and following a 3.5% increase in the second quarter.


Productivity in manufacturing, a sector that's been slowing after leading the economy's recovery, rose 0.6% in the third quarter, compared with an earlier estimate of 0.4%. Manufacturing productivity had increased by a revised 5.6% in the April to June period.


Hours worked in the manufacturing sector rose by 3.6%, unchanged from the preliminary estimate.


Private-sector jobs in the U.S. rose by 93,000 last month, according to a national employment report published by payroll company Automatic Data Processing Inc. and consultancy Macroeconomic Advisers. It was the largest monthly gain in three years, the report said. ...


The report said the survey "shows an acceleration of employment and suggests the nation's employment situation is brightening somewhat."


The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers. ...


The latest ADP report showed large businesses with 500 employees or more added 2,000 employees, medium-size businesses added 37,000 workers in November, and small businesses that employ fewer than 50 workers hired 54,000 new workers.

The Challenger Job Cut report was less sanguine. Announced layoffs for November were significantly up, 48,711, from October's 37,986.

Today's Jobless claims report showed an up-tick to 436,000, up from last week's 410,000, but it still reflects a downward trend.

State Tax Revenues

A report from the Rockefeller Institute shows that state tax revenues have increased. Note sales tax increases.

Preliminary tax collection data for the July-September quarter of 2010 show continued improvement in overall state tax collections as well as for personal income tax and sales tax revenue. However, revenue collections remain significantly below peak levels and are still weak in a number of states. ... The Rockefeller Institute’s compilation of data from 48 early reporting states shows collections from major tax sources increased by 3.9 percent in nominal terms compared to the third quarter of 2009, but was 7.0 percent below the same period two years ago.


Gains were widespread, with 42 states showing an increase in revenues compared to a year earlier. After adjusting for inflation, tax revenues increased by 2.6 percent in the third quarter of 2010 compared to the same quarter of 2009. States’ personal income taxes represented a $2.5 billion gain and sales taxes a $2.0 billion gain for the period. In terms of dollars, New York reported the largest increases in total tax collections in the third quarter of 2010, with revenue collections rising by $577 million or 4.5 percent. This was mostly driven by growth in personal income tax collections and by modest growth in the sales tax. ...

Sales tax collections increased by 4.1 percent in the third quarter of 2010 compared to the same quarter of 2009, but were still 5.1 percent lower than two years ago. With 43 of 45 sales-tax states reporting so far, only six states reported declines in sales tax collections compared with the same quarter last year.

The Fed and the government should immediately stop what they are doing and get out of the way of a recovery or they risk killing it.

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Arkadaba's picture


I would really love it were the world past this fiscal crisis and/or depression but I just don't buy it because it would illogical to do so. (Disclaimer: I did study formal logic at the university level and loved it).

From the beginning of the crisis and before, some were warning of the risks major banks were taking and the ramifications of those risks, which emerged in 2008. Jesse from http://jessescrossroadscafe.blogspot.com/  stated often that in order for recovery to take place, the "bezzle" would need to confronted and dealt with. Has it? In my opinion, no. All those toxic assets are out there - somewhere. I know Denniger is not popular on this site (I'm curious to know why) but he has an interesting article on the amounts of collateral the banks put up for the various Fed programs:


I'm not an accountant but even to a layperson this looks like it invites further investigation.

Now my bullet list:


  • The unemployment rate has not gone down. There may have been minor upticks but it looks like we are stuck here for a while. Structural not cyclical.
  • Housing prices continue to deterioate.
  • Gold and Silver have made new highs
  • If the EU can hold it together for another year, I will be very surprised.
  • Greatest income inequality since the 1920s in North America. Yes Canada, you too. (In the past the overlords recognized that throwing a few bones to the peons and providing upward mobility to the smartest in the underclass made good economic sense - not so much now)


And yes I can provide links for all of the above but it really is time to start figuring this out for yourselves (as most ZHs have done).


putbuyer's picture

Wrong blog bro. Rainbows and Unicorns blog over there...

Withdrawn Sanction's picture

Hmmm.   What all your charts say to me is the peak in the data occurred in spring 2010.  That makes a lot of sense as it would coincide roughly with the monetary and fiscal stimuli from 2008/9 having run their course.  Moreover, w/the bank lending channel effectively shut, for that time, there's no prospect of a credit multiplier (so any given stimulus is even less effective than it normally would be).  So we get the first wave down of the post-stimulus hangover in late spring/early summer 2010, followed by a natural bounce.  Now comes.....?

tom's picture

QE2 so far is playing out as expected, as pre-launch expectations that it would be inflationary are being confirmed by the first early post-launch signals. First is M1 growth going gangbusters. Second is foreign central banks being crowded out of the Treasury market. For the past two weeks they have collectively slightly reduced their holdings in Fed custody, in sharp contrast to their $20b/week gobbling up of Treasuries from mid-August to mid-November (perhaps hastened by attempts to frontrun QE2, which were overdone and so didn't work out well, or perhaps by desire to stock up on Treasuries before QE2 crowded them out).

Billion dollar question of the month: what are the foreign central banks buying instead of Treasuries?

nathan1234's picture

Sounds like A Fedphile.

Acts as if he is colorblind. Cant see what's really happening with the data or just being paid off by some Wall Street crooks for the disinformation being put out.

Mentaliusanything's picture

If America is a consumer society, don't look outside it and you will be fine.

The real problems are showing teeth in other "supplier" lands.

The Christmas hangover will be a real and reminding headache.

Bob Sponge's picture

I don't trust anything the Rockefellers put out.

blindman's picture



Smoking gun: the hearing when Bernanke told Ron Paul that he wouldn’t be bailing out any foreign banks December 2nd, 2010

minute 5:00

jomama's picture

was ben shalom under oath? 

not like that would mean anything anyway, would it?

blindman's picture

i think he was and i think it matters.  it is referred to

as "testimony".

"In law and in religion, testimony is a solemn attestation as to the truth of a matter."



Bernanke testimony | Helicopter Ben vs. Ron Paul Thursday, February 25th, 2010 By ....
Traianus Augustus's picture

It's only a smoking gun if there are bullets in the chamber, and the US cartel made sure there is no ammo left.

treemagnet's picture

No POMO! - dare to dream.

Busy-Body's picture

3 words about this article and the previous article - ABSOLUTE FUCKING DRIVEL........

taraxias's picture


Traianus Augustus's picture

Believe what your eyes see...as long as you are seeing what the government/bankers want you to see.  By all means don't under any circumstance use common sense or try to analyze where they got those fucking numbers from because you will either go blind or crazy!!!!

blindman's picture


O.V. Wright ~ I'd Rather Be Blind, Crippled, and Crazy ?

Everybodys All American's picture

Did you consider the Fed may be the only one desiring our debt and when interest rates rise back to normal levels the debt is unsustainable overnight.