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The Diminishing Effects Of QE Programs
Submitted by Lance Roberts of Street Talk Live blog,
There has been much angst over Bernanke's recent comments regarding an "improving economic environment" and the need to begin reducing ("taper") the current monetary interventions in the future. What is interesting, however, is the mainstream analysis which continues to focus on one data point, to the next, to determine if the Fed is going to continue its interventions. Why is this so important? Because, as we have addressed in the past, the sole driver for the markets, and the majority of economic growth, has been derived solely from the Federal Reserve's programs. The reality is that such analysis is completely useless when considering the volatility that exists in the monthly data already but then compounding that issue with rather subjective "seasonal adjustments."
The question, however, is whether such "QE" programs have actually sparked any type of substantive, organic, growth or simply inflated asset prices, and pulled forward future consumption, for a short term positive effect with negative long term consequences? The 4 panel chart below shows the annual changes of real GDP, employment, industrial production, and personal consumption expenditures. I have noted the beginning and end of the 3 different "QE" programs.
As you can see during the first round of Quantitative Easing, which was also combined with a variety of artificial stimulus, bailout and support programs, the economy got a sharp boost from extremely depressed levels. The influx of liquidity stabilized the economy and production levels recovered. However, it is clear that after that initial boost, subsequent programs have done little other than to stabilize the economy while flooding the asset markets with liquidity. As shown, even with these programs in play, the current annualized growth trends of the data are showing clear deterioration. This puts the Federal Reserve in a difficult position of trying to exit support as the economy weakens.
David Rosenberg, in his recent missive, made 5 excellent observations about these diminishing effects of QE programs.
"1. Is it still the worst economic recovery ever.
2. The Fed eased and eased and eased, but bank credit growth has been anemic to say the least – a critical element in this expansion and the lack of credit growth has caused the economy's trajectory to have changed materially from what we have experienced in the past six decades.
3. Everyone seems worried about the impact on higher mortgage rates on the housing market and yet this recovery in residential real estate has had little to do with Fed policy or what bond yields are doing. Affordability at is most lucrative levels this cycle did little to entice first time buyers, who still command a recession-like 30% shares of sales activity (the first time buyer shares of resale activity fell to 28% last month from 34% a year ago and 36% two years ago). This has been and remains a housing market dominated by all-cash institutional investor deals aimed at buying-for-rent.
4. The "wealth effect" only works if the positive shock is deemed to be permanent as opposed to transitory. I am amazed that this basic premise of permanency and the impact on expectations managed to escape the Fed escape-velocity models. The newly found net worth must be seen as more than temporary, but who doesn't know that all these capital gains, whether through equities or housing, weren't artificially stimulated by Fed policy as opposed to some major positive shock from underlying private sector economic forces?
5. What the Fed managed to do this cycle was help the rich get richer with no major positive multiplier impact on the real economy. Sorry, but Peoria Illinois, probably does not know how to locate the corner of Broad and Wall. So the Fed, by virtue of its excursions into the private marketplace for capital, manages to engineer the mother of all Potemkin rallies, sending the S&P 500 up 140% from the 2007 trough to attain record highs by May of this year (even with the June swoon, the SP 500 still managed to eke out a 2.4% advance in the second quarter and is up 12.6% for the year in the best first-half performance since 1998 when GDP growth was 5.5% ... for this the Fed should just continue with the status quo?). It took but six years to make a new high in the stock market. In the Great Depression, it took 25 years. Bravo!"
For the Federal Reserve it is highly unlikely that a single data point of inflation, or employment, is going to affect their current monetary policy stance. However, the real issue is that IF the recent negative trends in consumption, employment and inflationary pressures do not start to reverse it is highly likely that the Fed will not be able to extract the monetary supports anytime soon. The recent increases in interest rates, combined with still very weak wage growth, higher costs of living and still elevated unemployment is likely to keep the Fed engaged for the foreseeable future as any attempt to remove its "invisible hand" is likely to result in unexpected instability in the financial markets and economy.
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Sorry to repeat myself but anyways:
How strange. The people with no money don't buy anything.
How strange. The hole keeps getting deeper but the dirt around it keeps piling up higher. Everyone knows you need dirt to fill in holes. I'd better keep digging.
keynesian economics vs austrian economics. Who'll win. It's the same as asking how a drunk man should sober up the morning after. Should he drink water and ruin his day or have another beer and party on. The analogy with addiction is astonishing.
Nice going Bendonkey, Timmy, Draghi and all of u fuckers.
Bendonkey Carn? Who's gonna save us? Super Maxkeiserio? Maybe it's time for me to go to sleep. Way past my bed time.
Well - just my opinion - I think Benny & Jamie and Llllllloyd & et al know full well diminishing effect. They give a fuck. Will pump until effect = ZERO, maybe -1%, -5%.... algos working overtime to compute precise exit points at scenarios A, B, C, whatever. Biggest game of "chicken" ever played, and it's simply a numbers/rate-of-return/acceptable "loss" [failed gain] computational scheme, with pre-set triggers, no doubt. Prolly got $100 B/mo, $200 B/mo etc in formulas, too. Should be interesting....
Mr. Roberts,
Growth is dead. QE is working fine; it continues to redistribute income upward. What's the problem? /sarc
i was one of those wealthy but i did not get richer because i read this site and sinclairs site and did not put money into the market, though i did buy real estate. it was the mistake of a lifetime. i should have at least listened to farber a couple years ago. he said 25% metals, 25% stock, 25% bond and 25% cash. he is the one who got it right before the crash, during the crash and probably after the crash.
Strange... other than missing an entirely fabricated rally... I haven't done that badly with raw land & PM's...
Even discounting for the price suppression gold has performed quite well over the last 5+ years and with so much global uncertainty out there still promises to outperform in the future...
http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
i havent either. however, we could have done better. yea, we didn't get everything but we should have gotten more.and that is not greed. it is simply a realization that the fed was telecasting what it was going to do.
Central planning for central planners. SSDD.
The only thing the Fed can do is print money and hand it over to the too big to fail banks in the form of QE which lead to lower standard of living for all the citizens of a country except for the beneficiaries of the bailouts. The poor people in any country live hand to mouth and do not contribute to tax revenues. The others who earn their living by small businesses or salaries pay taxes at a much higher rate than the rich individuals or big businesses. This is due to the loopholes in the taxation system which enable them to declare maximum profits in countries which have the least tax rates. So effectively in the long run the governments route the money collected as taxes from the middle class of people to the banks so that the bankers can enjoy enormous bonuses. We are in times of privatizing the profits and socializing losses for those who are well connected to the governments and the law makers.
The money which TBTF banks get in the form of QE is used to speculate in currency, stock, commodities and bond exchanges. None of this reaches the main street and hence recovery in the actual economy is not possible through QE. Moreover speculation in commodities like Oil and agriculture products lead to higher prices thus making the lives of the common citizen miserable.
http://www.marketoracle.co.uk/Article40231.html
It is important to understand what QE is about, and only what it is about. It is a fiscal tool of the Federal Government to buy the bonds from deficit spending that will not be absorbed by the market, and to protect the balance sheets of the banks by creating a demend for housing to off load the housing assets fro the banks. This is, and never is about employment. Employment is a by product of the hoped for velocity thrugh deficit spending and homepurchase knock-on spending. The Keynsians also are trying to increase velocity by healthcare and clmate change regulation and taxation to force more money into circulation.
Banks aren't lending it out, because they are acting rational (no worthy borrowers), and the inflation that will be released is velocity dampening as it will immediately cause defaults and debt liquidation, which ends the era of Central Banks.
So they will chug along and continue to buy until food and oil end the game.
I believe, at some point, the banks will be forced with a survival decision to either lend to anyone who breathes or to go bankrupt. At that point the velocity of money and liquidity will increase simultaneously and we will have hyperinflation. Because the banks are sitting on the trillions of dollars that the Fed has used to buttress their balance sheet, there has been a small amount of inflation (compared to what their should be).
For the moment, the shadow banking system is deleveraging and decreasing liquidity which is what the Fed is trying to counteract (hats off to Mish for pointing this out).
Now what would cause the banks to lend to anything that moves ... survival trumps intelligence. It might be the Fed starts charging to keep the money and not pay interest. It might be that the Fed goes neutral and doesn't pay interest. It might be that the derivatives mountain is about to collapse and the the banks figure "What the hell, it might work ..."
You are going to need more ice in that bucket of cold water and a MUCH larger bucket to compete with the FED
The invisible hand, in the end like a hand up your ass... :(
The "Federal" Reserve is truly destoying the entire planet. The eventual blowback from their policies can only be something horrific; I would imagine the streets of New York and D.C. are eventually going to be the sights of daily Boston Marathon-like events. Daily.
The Boston Event was a religious protest ... Economic protests can't seem to muster the same passion. If Corzine can walk away with hundreds of millions and everyone yawns, the intense passion is not there. People's fiscal crises seem to mollify too quickly to flow out in violence.
The government must be running out of money because I've been going into debt at a slower rate than any time in my past.
I can't really point to anything concrete that I can see as the result QE1, 2, 3 or 4 in terms of the real economy. Had it been allowed to crash and re set in 08 we would have had a sharp contraction followed by historically 4% annual organic growth. However, Mullah Obama and the Bolsheviks killed that in the cradle with ACA, mountains of regs and an anti biz climate not seen since FDR.
We are long since beyond the time anyone could argue with a straight face any residual benefit to QE other than not collasping the global economy. It has exported commodity inflation and bubble assets all over the world and hasn't done a rat's ass for this country other than phantom housing and equities (O&G exploration, recovery and related support is only real growth area).
In point of fact you could well make the case it is causing global 3rd world instability by driving up food prices that make up roughly 1/2 of the average peasant's take home pay. Look closer at Egypt and what is driving that is primary food and fuel costs.
Love me some Lance!
:D
It's a bitch when even counterfeiting doesn't work anymore.
You totally miss, the point. The goal is not to improve the economy, but to save the big banks.
QE works perfectly.
The Archies - Sugar, Sugar (Original 1969 Music Video)
http://www.youtube.com/watch?v=h9nE2spOw_o (3:02)
Judging by the bank of england and the european central bank today they have no intention of stopping QE - how long has this site been predicting doom and gloom for? 5 years now.
Print, print, print.
Government is accountable to no one. This is the core problem.
Government tells us that voters make the choices and they do. But once elected, rules and laws are broken without enforcement.
QE? Just another pile of shit created by government to justify their current existence in size and cost.