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The Fed Is Expected to Launch QE3 Next Week ... Which Would Help the Rich and Hurt the Little Guy
Many speculate that the Fed will launch QE3 next week.
But independent economics and financial experts say this would hurt – rather than help – the economy.
Dallas Federal Reserve Bank president Richard Fisher said:
I firmly believe that the Federal Reserve has already pressed the limits of monetary policy. So-called QE2, to my way of thinking, was of doubtful efficacy, which is why I did not support it to begin with. But even if you believe the costs of QE2 were worth its purported benefits, you would be hard pressed to now say that still more liquidity, or more fuel, is called for given the more than $1.5 trillion in excess bank reserves and the substantial liquid holdings above the normal working capital needs of corporate businesses.
William F. Ford – former president of the Federal Reserve Bank of Atlanta – notes:
One of the overlooked consequences of the Federal Reserve’s recent rounds of monetary stimulus is the adverse impact those policies have had on the interest income of savers. The prolonged and abnormally low interest-rate structure put in place by the Fed has made life particularly difficult for retirees and others who depend on conservative interest-sensitive investments. But the negative effects do not stop there. They spillover into the overall performance of the economy.
Our estimates show that these negative effects, resulting from the Fed’s two rounds of quantitative easing (QE1 and QE2), are sizable and may help account for the lackluster character of the current recovery.
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By lowering interest rates to historically unprecedented levels, the Fed’s policy deprives savers of interest income they normally would have earned on the interest-sensitive assets they hold. Thus, there is an income channel that no one is talking about, and its negative impact can be powerful.
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Table 2 below shows our estimates of the possible losses in spending power, output, and employment generated by the Fed’s artificially low interest rates. Even by our most conservative estimate, which only looks at the $9.9 trillion in assets most directly affected by depressed yields on Treasurys, the losses are impressive. The average yield on Treasurys in June 2010 was 2.14 percent compared to an average of 7.07 percent in the previous nine recoveries, a difference of 4.93 percentage points. The projected annual impact of this loss of interest income on just $9.9 trillion of rate-sensitive assets translates into $256 billion of lost consumption, a 1.75 percent loss of GDP, and about 2.4 million fewer jobs. (Our calculations assume that the recipients of interest income face a 25 percent average income tax rate and consume 70 percent of their after-tax income.)
Had these jobs not been lost, the unemployment rate would be 7.5 percent, instead of the current 9.1 percent, and this is the minimal effect we estimate.
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As the estimate of the total of affected interest-sensitive assets gets bigger, the negative effects of depressed yields becomes even more striking. Using our mid-point estimate of $14.35 trillion of interest-sensitive assets, a 4.93 percentage point reduction in interest rates annually cost the economy $371 billion in spending, 3.5 million jobs, and 2.53 percent of GDP. This is a sizable effect, given that during this time GDP grew by only 2.33 percent and the economy added only 870,000 jobs.
With the additional jobs that might have been created by higher interest income levels, the unemployment rate could fall to 6.8 percent. And output could grow more than twice as fast as it has. The resulting GDP growth rate of 4.86 percent would then be closer to the average second-year growth rate of the past nine recoveries, and the U.S. economy would be well on its way to a vigorous recovery, rather than struggling as it is now.
This midpoint appraisal is our best estimate of the likely effect of the Fed’s policy. It may still be on the low side.
The numbers do not account for any so-called multiplier effects. Additional spending by recipients of interest income creates revenues for businesses, which in turn increases the income of their owners and employees, who themselves spend more. This, in turn, could boost overall spending and employment by more than the gain in interest income alone would suggest.
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The housing market has not even begun to recover since the QE initiatives were created. U.S. auto sales and the stock market also remain well below pre-recession levels. And the sharp decline of the U.S. dollar has not created an export boom. But it has put upward pressure on the cost of our food and energy imports.
And tens of millions of U.S. savers, largely the elderly, still are facing strained circumstances created by Fed-driven abnormally low interest rates across the entire Treasury yield curve.
The negative impacts on output and employment caused by quantitative easing through the interest income effects shown here are large. In fact, they may outweigh the expected, but hard-to-document, positive effects of the QE program.
In fact, it has been thoroughly-documented that quantitative easing is great for the wealthy, but terrible for the little guy.
As the Guardian reported last year, quantitative easing increases inequality:
Quantitative easing (QE) … have contributed to social unrest by exacerbating inequality, according to one City economist.
As the Bank of England considers unleashing a fresh round of QE, Dhaval Joshi, of BCA Research, argues the approach of creating electronic money pushes up share prices and profits without feeding through to wages.
“The evidence suggests that QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it,” Joshi says in a new report.
He points out that real wages – adjusted for inflation – have fallen in both the US and UK, where QE has been a key tool for boosting growth. In Germany, meanwhile, where there has been no quantitative easing, real wages have risen.
The Washington Post reported last month:
How might a third round of quantitative easing (QE3) affect the already-wide levels of inequality in the United States? Across the Atlantic, the Bank of England has come in for some criticism this week after it released a new report showing that its own quantitative easing efforts have disproportionately benefited the wealthiest:
The richest 10% of households in Britain have seen the value of their assets increase by up to £322,000 [$510,000] as a result of the Bank of England‘s attempts to use electronic money creation to lift the economy out of its deepest post-war slump. …
The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.
It’s not hard to see why this happens. One way the bank’s quantitative easing program works, in theory, by pushing up asset prices in order to support the broader economy. And, according to the Bank of England, the median British household only holds about $2,370 in financial assets. So the direct benefits largely accrue to wealthier households.
What about the United States? Much like in Britain, the distribution of financial assets are also heavily skewed. As you can see on page 26 of this Fed report (pdf), the median American family in the middle income bracket has about $19,900 in financial wealth. By contrast, the median family in the top income bracket has $423,800 in financial wealth. So any move by the Fed to push up asset prices is likely to increase wealth inequality in the short term.
There are other effects, too. As The Wall Street Journal has reported, the Fed’s efforts to bring down interest rates have mainly helped better-off Americans with good credit scores. For instance, it’s exceedingly cheap to get a mortgage right now — for a small number of people. (The folks at Zero Hedge, who are no fan of Bernanke’s stimulus efforts, have compiled a much longer list of links on how the Fed’s quantitative easing program benefits the wealthy.)
Indeed, Bernanke knew in 1988 that quantitative easing doesn’t work. But he keeps caving in to the super-elite, and implementing it anyway.
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Crossing the Potomac on a semi-daily basis
the rub is (of course) they are not criminally mismanaging things - they dont LIHOP they MIHOP
bernanke et al. are carrying out orders according to a global agenda being implemented in parallel across all nation states, which are today little more than mere titular adjuncts for the global spider web, the nation state is merely an atavistic construct now used to keep geographical populations locked into a false perception that political activity hasnt been effectively shunted into the grid - the banking cartel is just one module of course
it is a congame plain and simple, and the NWO has stolen the planet quietly, via incrementalism
"In fact, it has been thoroughly-documented that quantitative easing is great for the wealthy, but terrible for the little guy."
this is why they simply cannot allow competing currencies, if you had constitutional money the house of cards would come apart
another great write-up by George Washington, I would follow you into the very gates of hell sir
You sir (mam?) (referring to @diogeneslaertius at 15:36) ... seem to 'get it'. The bigger picture that is.
So many ZH posters just sort of nibble about the edges,
though granted, most all no doubt sense they're getting screwed via banksters and governments.
There is an agenda in play. It's not just about control, but control so as to steer the world in a certain direction. Unfortunately, the Powers That Be are pathetic, being born wealthy, pampered and provided for. Their hubris is an reeking stench. Their vision for the world is likewise flawed. Via their parents origination of central banking they have amassed an incredible amount of capital, gained control of the planets major corporations, bought governments top to bottom. A formidable force/adversary to be sure. Nevertheless, they aren't the correct prescription for what ails the world. More like they are a spurious virus the world has to overcome.
And I 2nd your statement... George Washington is admirably following in his name sakes path,
for that he gets my respect and admiration.
funny but i bet that 'george washington's' real name is something like grigor kostyantyn or some other ukranium name....this is pure anti-american propaganda to incite the masses. it may be true but come on people half the ZH stories are now just as bad as the rt.com ones....written by the politburo in moscow for christ sakes. tokyo rose cooking borscht soup for the comrads.
i cant wait for the fourth bureau posadist stories about how obama is a space alien bringing socialism to the planet earth.
Wow, where did you come from? I think I'm going to have to have another shot of vodka to cope with this comment!
You are at the wrong website. May I recommend any of the following http://www.politics1.com/issues-left.htm . You will find no propaganda on any of this host of sites... I assure you.
As you admit "it may be true"
If it is, why attack the messenge?. You don't like being informed that what you hold holy and dear, may not be so holy after all?
Which "little investors"? Most every retail investor is already lying naked in a roadside ditch with a bloody asshole the size of Joe biden's mouth.
The constant potty mouth posts are not only offensive - they're completely ineffective.
And if one's propaganda is ineffective, why bother?
This kind of comment makes its poster appear to be a 15-year-old pimply-faced little boy daytrading from the Short side with money from his newspaper route.
Which may or may not be accurate.
I mean really?!??!??!!!! Have you actually been paying any attention to any of what the investors on this site have been commenting about? Most of these guys have been through the cleaners and back because they cannot compete in a rigged market. High frequency trading, selective application of the rule of law to squash the little guy while the TBTFs are outright stealing with the unofficial and quiet consent of our government, the rigging of markets through algorithms and news headlines, the use of propaganda to prop up the latest IPO (think Facebook) while the TBTFs short like there's no tomorrow to make a killing off of people's naivete, etc. etc. etc.
From what I've read here (and I refuse to play in the paper market mind you) there are still some honest people who are trying to invest in the markets either personally or because it is their vocation. While I do not agree with their choice of investment or vocation, your comment is akin to blaming the rape victim for wearing too short a skirt. And furthermore, I would rather read the truth with some vulgarities laced in rather than hear the same old bullshit complacency from the mainstream propoganda machine any day.
This isn't Seeking Alpha, Ven. This is Fight Club. Deal with it.
Edit: (I saw your posts there years ago. I respect you and your opinions. ZH is probably the LAST place on the blogosphere where we can still speak our minds. Some people call a spade a spade. Others call it a F***ing shovel. It's wonderful to be able to excercise our 1st amendment rights).
Hat Tip: Tylers Durdens.
"This kind of comment makes its poster appear to be a 15-year-old pimply-faced little boy"
why object since this will be the greatest victim
societies that have the largest number of profane words are usually the most victimized
profanity over dishonesty any day of the week
To sum up:
profanity - bad
scathing ad hominem personal attcks - good.
I sometimes find it amusing sometimes if it is creative but it makes me hesitate suggesting the site to people that would get something out of the site otherwise.
"I sometimes find it amusing sometimes '
So what you are trying to say is that on occasion you occasionally...........
I applaud your sensibility. Here on ZH I am seeking intelligent, calm discussion. Name calling shuts down communication and is ineffective.
Have you ever, um, seen Fight Club?
QE helps the Markets, which benefits us "little guys" below Zillionaire status, who tend to be Active investors and traders playing from the Long side.
Since the Zillionaires have in recent decades taken both a Passive and a Short Sale-oriented view of the Markets, they are actually HURT by QE, which is why so much Zillionaire-sponsored Propaganda is dead set against it.
Maybe a big enough and dramatic enough dose of QE - plus some heavy jawboning of the Limousine Liberals, who have mostly played Short, to suddenly start playing Long against the virulent Supply Siders - would actually work this time around.
Of course, we all know what would really work the best, do we not? A complete ban on hedge fund managers owning financial media outlets, plus a thorough and honest investigation into massive Propaganda-oriented Botnets bought and paid for by Those With Strong Stakes in World Markets, followed by a ban on such "Market participation," which has evolved into blatant Market Bullying.
*snort* Yeah, okay. Whatever.
...Sound money would work.
Banning/not banning groups of people, jiggering the money handle this way or that, etc. serves only to perpetuate the existing system. I think we're long past the point of "wait and see" policies.
it isnt about "money"
its about CONTROL
I need a beer
jb
george - didnt you get the message ...? ben doesnt care about you and will print to save his ass...period.
with the right point of view everything becomes clear and one can see the future.
Bernanke's ZIRP and NIRP have been an enabler for crazed federal government spending. In the meantime these policies have destroyed my life and the lives of millions of other retirees who, as a result. are no doubt contributing to the escalation in food stamp recipients. May he RIH.
As a footnote you did not mention the effects of ZIRP on the vast underfunding of defined pension plans, which are mainly public employee pension plans, funded by the taxpayers
An increase in intererest rates would be welcome. This .25% return on MM funds is nasty. However, I wonder if the Fed's balance sheet could take the drop in its assets if interest rates were increase resulting in less valuable bonds it is holding. There is that and the interest on the US debt which would exacerbate an already bad fiscal situation.
I fear the Fed has boxed themselves in with ZIRP. Maybe Cramer was right when he was screaming "They know nothing". Right, but for the wrong reasons.
The FED is in a vicious circle. If they raise interest rates, investors will jump into MM, and equities will crash. Why do MM when Intel pays a 3.5 percent dividend? The only thing supporting equities right now is the FED policy. All time low interest rates, all time high stock market --- this equity pumping is doing nothing for the economy. The economy will only turn around if we have productivity improvements. But the idiots in Washington have no business experience, and they don't understand that principle. So instead of cranking up productivity through less regulation and tax, the US Government is piling on all kinds of additional friction that terrorizes business productivity, like OsamaCare -- imposing more, not less, regulation and taxation. The FED is just FUD, pushing on a rubber band.
The FED is in a vicious circle.
I am sure it thinks of it as a "virtuous cycle".
Why do MM when Intel pays a 3.5 percent dividend?
Because Intel is going back to $5 when this pig crashes.
Exactly. Some people treat dividend stocks like de facto money market funds. As you point out, if Intel share prices drop, say 7%, it wipes out two years worth of dividends.
Keeping the "market" up saves EVERYONES 401's and pensions.
If the "little guy" has neither of these, we're talking socialism.
A vicious circle
engineered by design to create precisely these conditions
and what is the net result of said conditions if not the evisceration of individual sovereignty
the goal is precisely as youve said "all kinds of additional friction that terrorizes business productivity"
+1... Correct analysis...