Submitted by Lance Roberts of STA Wealth Management,
I have discussed many times in the past the Fed's ongoing Quantitative Easing (QE) programs and their ineffectiveness of generating "self-sustaining" economic growth. While the Fed's interventions have certainly bolstered asset prices by driving a "carry trade," these programs do not address the central issue necessary in a consumer driven economy which is "employment."
In an economy that is nearly 70% driven by consumption, production comes first in the economic order. Without a job, through which an individual produces a good or service in exchange for payment, there is no income to consume with. While income can come from social welfare, as seen in the latest personal income data, these dollars are derived from the production of others through taxation.
Like any common accounting equation, if taxation is increased on one side of the ledger, the offset is lower consumption, and ultimately economic growth, on the other. This is why the multiplier from government spending, and social welfare, is effectively near zero, if not potentially a negative.
The problem with the Federal Reserve's ongoing QE program is that the inflation of asset prices, the "wealth effect," has not impacted much of the overall economy. A recent Bloomberg National Poll found:
"More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being."
This is not surprising when you look at the statistics of how wealth is divided in the domestic economy today. The video below, based on a Harvard Business School study, shows the wealth distribution in America.
Here is the key graphic:
When you consider that the lower 80% have less than one years savings set aside for retirement it is not surprising that:
"Seventy-seven percent of respondents dismissed the 176 percent rise in the Standard & Poor's 500 Index (SPX) since its March 9, 2009 financial crisis low, according to the poll, taken March 7-10. Barely one in five -- 21 percent -- said the market's gains have made them 'feel more financially' secure."
The poll also showed that most Americans still think the country is on the wrong track economically particularly as it relates to employment. The poll showed that:
"Thirty-eight percent anticipate hiring prospects to pick up compared with 24 percent who say jobs will be tougher to find. A year ago, poll respondents by 43 percent to 26 percent predicted labor market improvement."
This conforms with the recent NFIB survey which showed that plans for employment dropped sharply in the latest month, and remains at levels normally associated with the on set of recessions.
The President gets little credit for what gains in employment there have been. This is because it has been a function of population, rather than demand driven, growth. The chart below shows "full time" employment relative to the population. It is "full-time" employment that leads to household formation and stronger economic growth. The flat-line chart shows that job growth has paced population growth and little else.
The poll's findings confirm what I have been saying for the last couple of years. The Fed's ongoing interventions have been a massive boom to Wall Street and those in the top wealth bracket. From the poll:
"Those who participate in financial markets through 401(k) retirement plans often have only modest sums invested. Half of Fidelity Investments customers have less than $25,600 in their 401(k) accounts, according to Michael Shamrell, a spokesman.
Wealthier Americans have a greater share of their assets invested in the stock market, while middle-income households have more of their wealth tied up in their homes.
The wealthiest 10 percent of families earn 11 percent of their annual income from capital gains, interest and dividends, according to the Fed. The poorest three-quarters get less than 0.5 percent of their income from such sources."
I will agree that the "forward pull of consumption" caused by the Fed's interventions did stabilize the economy, and likely kept the previous recession from becoming far worse. However, the problem is that, like putting a comatose patient on a respirator, the artificial support cannot be removed without negative consequences.
The poll also showed this is still the single worst economic recovery ever.
The "wealth effect" only works if the positive shock is deemed to be permanent as opposed to transitory. What is amazing is that this very basic premise of creating a permanent impact on the economy has escaped the Federal Reserve, economists and Congressional representatives driving current economic policies. The problem is that a many of the respondents believe that the newly found net worth is simply an artificially stimulated illusion created by Fed policy.
However, as I stated, what the Federal reserve has managed to do this cycle was help the "rich get richer" with no major positive multiplier impact on the real economy. As David Rosenberg stated in July of last year:
"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!"
With the Federal Reserve now effectively removing the "patient" from life support, we will see if the economy can sustain itself. If this recent Bloomberg poll is correct, then we are likely to get an answer very shortly, and it may very well be disappointment.