This page has been archived and commenting is disabled.

Destroying The Myths Of Bernanke's Brave New World Of QEtc.

Tyler Durden's picture




 

Entering the final quarter of the year, Lacy Hunt and Van Hoisington (H&H) describe domestic and global economic conditions as extremely fragile. Across the globe, they note, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting. Of course, new government initiatives have been announced, particularly by central banks, in an attempt to counteract deteriorating economic conditions.

These latest programs in the U.S. and Europe are similar to previous efforts. While prices for risk assets have improved, governments have not been able to address underlying debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies. To avoid recession in the U.S., the Federal Reserve embarked on open-ended quantitative easing (QE3). Importantly, in their view, the enactment of QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth.

H&H go on to break down every branch that Bernanke rests his QE hat on from the Fed's inability to create demand, to the de minimus wealth effect, and most importantly the numerous unintended consequences of the Fed's actions.

Can all the trillions of dollars of reserves being added to the banking system move the economy forward enough to eventually create a higher level of aggregate spending? Our analysis of the aggregate demand curve and its determinants indicate they cannot. The unintended consequence of these Federal Reserve actions, however, is to actually slow economic activity.

The unintended consequences of QE3 could also serve to worsen and undermine global economic conditions already under considerable duress. When the Fed actions lead to higher food and fuel prices, the shock wave reverberates around the world, with many foreign economies being hit adversely. When prices of basic necessities rise, the greatest burden is on those with the lowest incomes since more of their budget is allocated to the basic necessities such as food and fuel. Thus, a jump in daily essentials has a more profound negative impact on living standards in economies with lower levels of real per capita income.

Three studies show that the impact of wealth on spending is miniscule—indeed, “nearly not observable.” How the Fed expects the U.S. to gain any economic traction from higher stock prices when rising commodity prices are curtailing real income and spending is puzzling.

The other element that is required for the Fed to shift the aggregate demand curve outward is the velocity or turnover of money over which they also have no control. During all of the Fed actions since 2008 the velocity of money has plummeted and now stands at a five decade low.

The consequence of the Fed’s lack of control over the money multiplier and velocity is apparent. The monetary base has surged 3.3 times in size since QE1. Nominal GDP, however, has grown only at an annual rate of 3%. This suggests they have not been able to shift the aggregate demand curve outward. Nor, with these constraints, will they be any more successful in shifting that curve under the present open-ended QE3.

 

 

Increased aggregate demand and thus rising inflation is not on the horizon.

 

Full H&H report below:

HIM2012Q3NP

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 10/16/2012 - 17:57 | 2896264 LULZBank
LULZBank's picture

FUCK YOU BERNANKE!!!

Tue, 10/16/2012 - 18:33 | 2896328 Landotfree
Landotfree's picture

LULZBank, you got it wrong... you and the rest of the lemmings are fucked.  

"the enactment of QE3 is a tacit admission by the Fed that earlier efforts failed"

Duh, the Fed has no ability to prolong the collapse forever, all they can do is assist in delaying the eventual collapse.   As the Fed does not have unlimited power.  All the efforts by the Fed will eventually fail.   

I think they are doing a good job in their mission in getting the lemmings to believe the helicopters are coming.   This system is the most successful global system in the history of man and it will eventually be the largest collapse in the history of man.   Really everyone is just going through the motions until this picks up again, eventually collapse and liquidation of the non-perform liabilities (lemmings).  

Tue, 10/16/2012 - 18:46 | 2896345 LULZBank
LULZBank's picture

Where and what did I get wrong?

And how do you know so much about my sex life?

Wed, 10/17/2012 - 06:37 | 2897501 Landotfree
Landotfree's picture

Your sex life is going be the least of your concerns by the time this is over.

Wed, 10/17/2012 - 08:06 | 2897557 LULZBank
LULZBank's picture

You dont know me, chum.

Bring it on... I've been expecting and waiting for it for years.

Tue, 10/16/2012 - 19:28 | 2896422 Twodogs
Twodogs's picture

Please keep your sexual fantasies to yourself.

Wed, 10/17/2012 - 08:06 | 2897555 LULZBank
LULZBank's picture

So basically you are not fucked and you are upset?

Tue, 10/16/2012 - 18:48 | 2896347 LULZBank
LULZBank's picture

Atleast they are smiling, despite.

Tue, 10/16/2012 - 19:00 | 2896368 Whoa Dammit
Whoa Dammit's picture

Aaand it's Gono!

Tue, 10/16/2012 - 18:02 | 2896273 Robslob
Robslob's picture

DEBT IS MONEY!

Thank You,
Management

Tue, 10/16/2012 - 18:04 | 2896274 malikai
malikai's picture

TD, why do you call it QEtc?

I thought this was QEternity 2.0.

Tue, 10/16/2012 - 18:07 | 2896281 fonzannoon
fonzannoon's picture

"Can all the trillions of dollars of reserves being added to the banking system move the economy forward enough to eventually create a higher level of aggregate spending?"

NO. You want to create aggregate spending and watch inflation roar? Send those checks to the people, not the banks. Putz.

Tue, 10/16/2012 - 18:08 | 2896286 Encroaching Darkness
Encroaching Darkness's picture

Bernanke considers himself a student of the Great Depression.

Unfortunately, he only studied the U.S. side.

If he had studied the German side (Weimar) he would know what happens when you try this remedy.

Oh well.

Tue, 10/16/2012 - 18:13 | 2896293 e-man
e-man's picture

Pretty soon, he will be considered a Master of the Greater Depression.

Tue, 10/16/2012 - 18:14 | 2896297 kito
kito's picture

which one is it?? the article talks about fed actions leading to a price jump in daily essentials, yet at the end (again, why tyler likes to bold statements that run counter to his own predictions puzzle me) states..... thus rising inflation is not on the horizon.

 


Tue, 10/16/2012 - 18:20 | 2896310 LULZBank
LULZBank's picture

The only fool proof and guaranteed sign of hyperinflation and collapse will be when you see people going around carrying money in wheelbarrows.

Till then its just armchair financial pundits sharing their insights.

Tue, 10/16/2012 - 18:37 | 2896338 Schmuck Raker
Schmuck Raker's picture

"The reality is, critical readers should read analytic posts and the rest of Zero Hedge with the blanket assumption that the author is totally "conflicted.""  -M. Singer

[Possibly taken out of CONTEXT]

Tue, 10/16/2012 - 18:19 | 2896309 buzzsaw99
buzzsaw99's picture

Pandit's pay over the past 5 years is proof that the bernank's policies are working as intended.

Tue, 10/16/2012 - 18:28 | 2896319 perelmanfan
perelmanfan's picture

"How the Fed expects the U.S. to gain any economic traction from higher stock prices when rising commodity prices are curtailing real income and spending is puzzling." Oh wait, I just figured it out! It's because the Fed's aim is to divert money to the wealthiest Americans who own virtually all stock, and let the poor starve. Actually, that wasn't too puzzling after all!

Tue, 10/16/2012 - 18:29 | 2896324 Hedgetard55
Hedgetard55's picture

Ben knows QE does nothing but transfer toxic assets from banks to the peeps, and debases the currency. That is the whole purpose.

Tue, 10/16/2012 - 18:37 | 2896336 calgal
calgal's picture

muppets dang it! the correct term is muppets!

Tue, 10/16/2012 - 18:55 | 2896356 kito
kito's picture

if i were holding the majority of my assets in gold, i would be a little nervous that romney will save the country and rid the world of bernanke and qe......................

 

http://www.sirchartsalot.com/article.php?id=169

Tue, 10/16/2012 - 22:21 | 2896971 jimmyjames
jimmyjames's picture

if i were holding the majority of my assets in gold, i would be a little nervous that romney will save the country and rid the world of bernanke and qe......................

*************

Right and replacing Bernake is all that's needed to reverse this shitshow?

Wed, 10/17/2012 - 06:21 | 2897494 GetZeeGold
GetZeeGold's picture

 

 

Right and replacing Bernake is all that's needed to reverse this shitshow?

 

That and about 16 trillion dollars.....could you spot us?

 

Tue, 10/16/2012 - 19:24 | 2896412 q99x2
q99x2's picture

Oh God. Time to wash my Bernanke again.

Tue, 10/16/2012 - 19:35 | 2896445 blindman
blindman's picture

trans-flation, aka stealing till the tolerance
wears out.
http://maxkeiser.com/2012/10/16/kr354-keiser-report-enema-state/
.
[KR354] Keiser Report: Enema of the State
Posted on October 16, 2012 by stacyherbert
.
Party Til the Money's Gone - WFH
http://www.youtube.com/watch?v=bhqm3q4kqx8&feature=relmfu

Tue, 10/16/2012 - 19:52 | 2896474 Pejorative Requiem
Pejorative Requiem's picture

Ironically, Ben recently gave a speech about how Fed actions should not be politicized; yet he dismisses arguments like those made here out of hand because of his ideological bent. Trying to convince Keynsians that this will all end badly is like trying to convince the Pope that abortion is a woman's right. It's that bad, folks. Ben and his people are true believers.

Tue, 10/16/2012 - 21:37 | 2896766 proLiberty
proLiberty's picture

It is impossible for a free market economyto function for long where the time value of money is suppressed to zero.   

Tue, 10/16/2012 - 22:32 | 2897016 LawsofPhysics
LawsofPhysics's picture

Again, the traditionally trained economic idiots miss the point. If you are arguing about hyperdeflation or hyperinflation there is a serious fucking problem with you monetary system. Wake the fuck up. Think about it this way, if I have the last barrel of oil, I won't be selling it, for any fucking price. If no one is selling, or things go bidless, does it fucking matter you dumb motherfuckers.

Wed, 10/17/2012 - 08:09 | 2897562 LongSilverJohn
LongSilverJohn's picture

Surely H&H must mean there may be no CORE inflation, but the rapid rise in commodities will spell overall stagflation, right? Low growth or contraction in GDP with high total inflation...

To free up consumer income and spending, why not permit homeowners to refinance over say 50 or 60 years at a rate that keeps the value of the loan intact? Surely the Fed could condition bank sector assistance on that type of program and the useful life of housing could easily support it. Better wealth effect that way than by trying to boost the stock market...

Wed, 10/17/2012 - 10:36 | 2897963 andyupnorth
andyupnorth's picture

Zimbabwefiatation, bitches!

(I think I'm the first to put those two words together)

Do NOT follow this link or you will be banned from the site!