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Quantitative Proof The Fed Is Destroying The Middle Class
Submitted by Thad Beversdorf via Voices Of Liberty blog,
Listening to pundits on television, one would think we’ve found a magical species of leprechauns that piss gold rainbows amongst the masses and so we need never again worry about the economy, the markets and whether or not things are improving. And looking at the market’s six-year run to all-time highs, perhaps such euphoria is warranted.
I mean, isn’t the market supposed to be a highly efficient gauge of the underlying economy? The market is a function of expected future cash flows based on demand, supply and productivity. If true, and if the market is at all-time highs, then things must be good, correct?
Let’s look into this proposition. Under historical, normal conditions the market has been a very efficient gauge of the underlying economy. However, these are not normal times and we have unprecedented monetary policies in place. As such, we need to confirm whether or not markets are functioning the same way today as they do in normal times. Specifically we need to confirm that the unprecedented money printing and the Fed targeting higher stock prices haven’t impeded the markets ability to gauge the underlying economy.
Now it’s very difficult to know exactly how much money has been printed since the beginning of the last collapse. I’ve heard figures close to $100 trillion (T) if you consider all of the bailouts globally. But looking at a conservative figure based on M2 money supply and the Fed’s own balance sheet we come to about $4T or $5T since the middle of 2007.
Since the collapse in 2008 we’ve had a first round of quantitative easing (QE1), a program of buying US Treasuries at a rate of hundreds of billions per month, followed by QE2. We are just nearing the end of QE3. In November 2010, then-Fed Chair Ben Bernanke explained the purpose of the purchasing programs was to boost economic growth through lower borrowing costs and higher stock prices. This is the first recovery attempt I am aware of that the Fed is explicitly targeting higher stock prices. The idea is to create a trickle down recovery. High equity values and low borrowing costs increase profitability expectations for capital investments by way of reduced capital costs. As such, prima facie, one would expect an increase in capital investments leading to job creation and increased demand which are the ingredients for a strong economy. From that perspective it seems reasonable that the Fed is doing the right things.
However, we have to remember that at the end of the day corporations are just money allocators like any hedge fund or mutual fund manager. CEOs are sworn to maximize shareholder funds. Understanding this we must expect corporations to invest based on the best risk/reward scenario available to them as we do for any other investors. Herein lies the invalidity of the Fed’s assumptions.
The Fed assumed that low borrowing costs and high equity values would drive corporate fixed capital investment. It did drive investment, but not fixed capital investment. Corporations, like all other investors, realized the stock market was being backstopped by the Fed. This essentially gave all market long side participants a free put option. In other words, the Fed was protecting folks from any downside risk by explicitly stating they were targeting higher stock prices. Thus corporations and everyone else realized the smart money was directly tied to the market.
To understand this more clearly, imagine you are a CEO of a company and you have sworn to make the best use of shareholder funds. Would you spend $1 billion (B) dollars building out new factories, expanding operations and hiring permanent workers under union contracts when the economy is still very unhealthy or would you simply invest that $1B into the stock market which you know the Fed is pushing higher?
When this strategy was first explained back in 2008, I put together a hypothesis that suggested such a strategy would in fact hurt not help economic growth. Given we are six years in, there is sufficient data to test my theory. Allow me to walk through the results.
My theory asserts the Fed is pulling money away from job creating fixed capital investment and toward no-growth investments, namely, financial markets. If this is correct we should see a decline in fixed capital investment and an increase in dividend payouts (dividends get paid out when the CEO is unable to produce better returns with that money than the shareholders can produce on their own i.e. in the market). Have a look at the following chart which depicts the fixed capital investment as a percentage of GDP less dividend payouts as a percentage of GDP.
Note the line goes negative, meaning dividend payouts exceed fixed capital investment around the time the Fed’s QE1 program began. Another effect is that we should see increased levels of corporate share buy backs. The reason is the same, however, an added benefit to share buy backs is that they reduce the amount of shares outstanding and thus increase the very important earnings per share ratio. Let’s see if corporate share buy backs did, in fact, increase. Have a look at the following chart.
Again the chart supports the theory. You can see the blue bars increase significantly during QE1 all the way through QE3. I’ve added black slope lines to indicate periods of QE and red slope lines to indicate periods between QE programs. I did this to see if, during the QE pauses, there were differences in the rate of increase of the share buy backs. You can see from the chart that buybacks increase at a higher rate (black slopes) during periods of QE than periods between the QE programs (red slopes). So this is all in line with our theory that these QE programs targeting low borrowing costs and higher stock prices led to increased corporate investment directly to the market.
We proved that while the Fed is targeting higher stock prices, money moved away from fixed capital investment and moved into financial markets. But why is this important? I mean, do we really care what CEO’s do with their money? The answer is absolutely and I will show you why. This is where the theory becomes a bit more interesting. I have not seen the following two charts produced or discussed anywhere else.
So this is a premier event folks. Grab your popcorn, sit back and enjoy the show! The theory suggests that allocating funds away from fixed capital investment and into financial markets is a good decision for CEO’s with their microeconomic viewpoints but a very ineffective use of funds from a macroeconomic viewpoint. Given the overall economy is macro by definition we should be able to observe a positive correlation between the first chart above (showing money moving from fixed investment to markets) and M2 money velocity, which represents how effectively we are allocating our money to generate output. Let’s take a look.
What we find is that as money is reallocated from fixed capital investment into financial markets the economy becomes less and less efficient. As a note, I regressed these two functions and found both statistical significance and very strong explanatory properties (adjusted R^2 of .8). Our theory seems to be getting stronger as we go so let’s not stop here. The theory also attempts to explain this inefficiency. It suggests that, as fixed capital investment declines, we get increasing slack in the job market due to reduced capacity. If this is true, we should also see a correlation between the first chart above and median household incomes which should decline as job market slack increases. Let’s have a look.
And again we find significant support for our theory. One can see simply by looking at the chart there is a strong correlation between the reallocation from fixed capital investment to financial markets and median household incomes. Specifically, as we move away from fixed capital investment we see a decline in real median household incomes. As a note, I regressed these functions as well and although not as strong as the M2 regression I found statistical significance and good explanatory properties.
There appears to be material quantitative support for the theory, but what does it all mean and how does it all work? Fixed capital investments are required to sustain long term economic growth. Without it capacity deteriorates. As capacity deteriorates jobs go away. As jobs go away demand goes away. As demand goes away we circle back to more capacity reductions and the problem becomes circular. And so it begs the question, why did the Fed implement such a flawed strategy? The answer is because it worked in the past.
What the Fed overlooked was that between the crash in 2001 and the latest crash the Fed decided to be more transparent in its activities. They did this in hopes of being able to steer market behavior to some degree. This resulted in a very different message than in the past. This time we all knew the Fed was targeting higher stock prices. This is something that was perhaps assumed in the past but not made explicit. That made all the difference in the world.
Without the Fed targeting higher stock prices the market is still a very risky investment and corporations will be more inclined to stick with their area of expertise. In effect, they will invest in their own operations rather than risk shareholder funds in risky financial markets. Remember the Fed was also targeting lower borrowing costs by way of interest rates. And so companies could borrow cheap money to invest, however, this time the borrowed funds went to the financial markets rather than job creating investments.
The Fed’s strategy of targeting higher stock prices to boost economic growth has done the exact opposite. This strategy has pulled money away from effective macroeconomic investments and into ineffective macroeconomic albeit effective short term microeconomic investments. The end result is that we have all time high stock prices but no economic growth. This is exactly what our theory predicted would happen.
Now in economic terms these are all sunk costs, incredibly high sunk costs, but sunk costs nonetheless. The right course of action at this time is to admit the Fed’s strategy failed and to implement a new strategy that aligns both microeconomic and macroeconomic incentives. Whether this will happen is looking doubtful.
We continue to hear Fed Chair Janet Yellen indicate the economy is not yet healthy enough to stand on its own and so they will have to continue with the current strategy until it gets healthier. Given our discussion above, we know that this will never work. We will be stuck in this economic lull until the Fed is ready to admit defeat and allow for a new more effective strategy to be implemented.
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Yes, yes. We get this. We really get it. No, let me put it more clearly. We really fucking get it. We really, really, really, really fucking get it.
ALibaba will save the middle class!!!!!.. !!!!
http://hedgeaccording.ly/2014/09/alibabas-jack-ma-open-to-joint-venture-...
No Comment needed
Layoff / Business Closing List: http://www.dailyjobcuts.com
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END THE FED!!!!!!!!!!
Lol...I liked it but I get it
This is akin to Geithner spewing publicly about the US and its "strong dollar policy". The all are a lying bunch of assholes. They are destroying wealth and purchasing power.
They are all a lying bunch of assholes. And that's the best that can be said about them!
leprechauns that piss gold rainbows - lol
old joke
Those last three paragraphs were well done...I think my friends and family might finally understand this.
its amazing to hear so many people continue to equate the general health of the economy with the SPX & DOW
So our economy is like American Airlines trying to become a bigger Southwest?
everyone still missing the big question - who gave the fed the right to jam the stock market-
no legal or moral basis whatsoever and look at the deficit and monster debt
Well said. Treason has consequences.
So help me god! If I ever run into Ben Bernanke, or anyone that even looks like Ben Bernanke, I AM GOING TO HAUL OFF AND KICK HIM SQUARE IN THE NUTS!!! AS FOR THAT YELLEN DUDE SAME APPLIES TO HIM!!!!!
My one goal in life is to outlive The Bernank and piss on his grave.
The title is incorrect. Destroying is no longer appropriate to use based on the charts above. Destroying occured from the late 1990's through the mid 2000's range. The corect term to use is "Destroyed" as in over, done, cooked, finished, put a fork in it, bend over the rail, and take it like a man. Every chart, graph, article, report, or piece of data reaches the same conclusion. There is no more middle class in America. Just the entitlement crowd that knows they're poor (and are experts at working the system), the aging Baby Boomers that think they can retire until they realize 70%+ of their income will be consumed by housing/rent and healthcare, the people that still think they are middle class (but are actually poor and just don't know it yet or can't see it), the government that now represents over 40% of the US economy (state, federal, and local combined), and the wealthy/super wealthly that live in never-never land and have no clue what is really happening. America has been gutted with the structural damage done being so severe that it will take generations to recover and most likely include a revolution. The only question that remains is will it be peaceful or violent. Hard to imagine it being peaceful, not with American's appetite for conflict/violence and not with some 300 million guns in circulation.
"We will be stuck in this economic lull until the Fed is ready to admit defeat and allow for a new more effective strategy to be implemented."
This is nonsense. The Fed is owned and operated by an oligarchy that WINS when the middle class loses. The real question is when will the Fed claim victory over the middle class so its oligarchs can move on to fighting amongst themselves.
Subsidized neglect and shuttering of productive enterprises, subsidized foreign violence, subsidized control fraud and bankruptcy for profit: the pentultimate coctail of malinvestment and politically negotiated economic dysfunction...
Century of Enslavement: The History of The Federal Reserve
http://www.youtube.com/watch?v=5IJeemTQ7Vk
.
http://www.corbettreport.com/federalreserve/
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"Part One: The Origins of the Fed
“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933
All our lives we’ve been told that economics is boring. It’s dull. It’s not worth the time it takes to understand it. And all our lives, we’ve been lied to.
War. Poverty. Revolution. They all hinge on economics. And economics all rests on one key concept: money.
Money. It is the economic water in which we live our lives. We even call it ‘currency'; it flows around us, carries us in its wake. Drowns those who are not careful.
We use it every day in nearly every transaction we conduct. We spend our lives working for it, worrying about it, saving it, spending it, pinching it. It defines our social status. It compromises our morals. People are willing to fight, die and kill for it." j.c.
A fraudulent monetary system based on debt.
If I lend you $20 @ 5%, in one year you owe me $21 even though you only have $20 (I dind't lend you anymore money).
Due to double entry bookkeeping, I control the only $1 available on the planet that neables you to pay down your debt.
You are a debt slave.
If I can slap enough complexity around this fundamental truth, the people won't be able to figure it even when people like me apply 5th grade math to prove it beyond all doubt.
That's because I fund and control the operant conditioning schooling system to enslave the minds of the masses.
That and all major establishment institutions Big Media to Big Oil.
Doesnt that debt require two signatures? Theres no hope for sheep willing to pay stupid tax
Doesn't a valid contract requre that there be a possibility for it to be fulfilled?
Yes, the average American consumer is a political and monetary neanderthal, but that doesn't make them the prime cause of the criminals who take advantage of them.
That's the short skirt defense... blame the victim for the crime because they didn't use the best judgment.
Yes, the sheeple have some blame in this - but why do you focus on the sheeple instead of the mass lying, mass thieving, and mass murdering Debt Money Monopolists?
Answer that question and then you will gain some insight into yourself.
Because laying blame wont fix it. The sheep are voluteers, not victims. The sheep have a choice to get educated about their monetary system and they have chosen NOT to. We the sheep have enabled the ones you want to persecute to take advantage of us. I dont blame the victim, I blame the voluteer. You enable and prolong the fleecing by directing your anger at the opportunists instead of taking away the opportunity.
One final request: audit the Fed.
“Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed. Money is so noble a medium that does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.” -- Ayn Rand
The owners of the Fed are looters. Isn’t it time we know who gets the loot, and how much they’ve stolen?
I find a very strong correlation between getting phucked hard the last 8 years and having less moeny then ever to spend [ regressing all the functions 4 times left and right, up and down, and found them all statistical significance and very strong explanatory properties (adjusted R^2 of .63972) and a little more].
So this only started in 2006? You vote GOP right? Faux News? Uh-huh. Did you happen to notice the strong correlation to "W" and decline? Thought so. Change the Faux Channel. You shouldn't be watching foreign owned TV anyway.
Stop procreating or slow it down and all these problems goes away.
Someone doesn't understand the distinction between defeat and victory here. The Fed is kicking our asses.
someday we'll have our brief moment in the sun
"The Fed assumed that low borrowing costs and high equity values would drive corporate fixed capital investment. It did drive investment, but not fixed capital investment."
Corporations were buying back stock, which the FED should have seen early on, yet continued to QE and QE and QE. So the FED obviously wasn't QEing in expectation of it driving fixed capital investment.
The OWNERS were looting the corporate facades. The OWNERS sell out $1 billion in shares, the companies buy back $1 billion shares - no net price decrease.
Wash, rinse, repeat.
This happened in 2007 as well.
“The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the Government ever since the days of Andrew Jackson.” – FDR letter to Colonel Edward House, Nov. 21 1933
Obama allegedly told the bankers that the only thing standing between them and the pitchforks, was him. So who owned who?
moneybots, WHO financed BankstObama into office? WHO fuinanced the media to promote him?
WHO finances government?
WHO finances the political machinery in this country?
Obama was financed into office and I have news for you. The buck doesn't stop with the President just because he says so.
Oh, and you don't necessarily get to keep your doctor, either.
They lie.
They lie to dupe people like you - when you aren't scrutinizing what actually is going on.
BannksObama is a puppet of the OWNERS of the megabanks, but they don't want YOU to know that.
So they give you a little Kabuki theater.
At least put up some level of cognitive resistance instead of quoting serial liar BankstObama as though that makes it authoritative truth.
Come on - have some self-respect.
"The Fed’s strategy of targeting higher stock prices to boost economic growth has done the exact opposite. This strategy has pulled money away from effective macroeconomic investments and into ineffective macroeconomic albeit effective short term microeconomic investments. The end result is that we have all time high stock prices but no economic growth. This is exactly what our theory predicted would happen."
Not just your theory. Bernanke wrote in 1988, that QE doesn't work.
"A man always has two reasons for doing anything: a good reason and the real reason."
~J. P. Morgan
People really need to stop being such chumps by swallowing the fake *ss "good reason" whole without even chewing on it.
"magical species of leprechauns that piss gold rainbows amongst the masses"
Mr Beversdorf: unwittingly, you've just provided a ready-made slogan to Robert Reich's campaign team in his quest to become a future Fed Chair . . .
<…I mean, isn’t the market supposed to be a highly efficient gauge of the underlying economy? The market is a function of expected future cash flows based on demand, supply and productivity. If true, and if the market is at all-time highs, then things must be good, correct?”>
Incorrect! Like all the ZH permabears who refuse to accept the “New Normal”. It is just as correct as the old normal was. Now, perpetual Fed intervention is needed to keep the markets moving higher and create the ‘wealth effect’. So what? It works doesn’t it? Millions are f***ing thrilled to see the results in the 401K statements. This is the way it is from now on, forget about lousy earnings, falling revs, high P/E’s, the worse the data, the more Fed intervention will be done and the market will go up. “Whatever it takes”. Embrace it, don’t fight it thinking this is some temporary insanity. It is the way it is because the alternative is total economic collapse. Dow 20k, then 30k…they will never stop creating $$. They have to, and they see there is no longer any downside, and investors see the Fed has removed all risk. They want you in the market…buy stocks and prosper.
Destroyed?? Get real, the middle class is loving it. Two SUVs in every driveway, a boat on the side of the McMansion. Zero rate loans to buy more toys. What planet are you living on?
"Like all the ZH permabears who refuse to accept the “New Normal”. It is just as correct as the old normal was. Now, perpetual Fed intervention is needed to keep the markets moving higher and create the ‘wealth effect’. So what? It works doesn’t it?"
No it doesn't. The debt bubble grows larger, which means a bigger disaster when it bursts.
The business cycle has not been eliminated, which means a downturn is coming. The 2000 downturn crashed the Nasdaq 76% and the 2008 downturn crashed the housing market.
A record 92 million people are not working. Real income has been falling, making it more and more difficult for people to make ends meet. 46 million are on food stamps.
Yes it does. Don't you see that even if the business cycle turns down, which it will, that the Fed will inject even more dollars into the stock market and the TBTF banks? It really is a new normal now. We will move between massive dollar creating when times are OK to unbeliveably humungous quadrillions per year dollar creation when times are bad. There is no going back.
Bottom line, if the real economy goes even more to shit, then even more printed dollars will get funneled into Wall Street. It's a win-win for stocks.
You don't get it yet. It's not sustainable. When 80% of people are spending the majority of their income on food and rent, there is no discretionary income and corporatins fail. Period.
And at that point in time, Goldman, et al will be short the market and pick up the rest of the chips. The only thing left to do will be the depopulation of the occupied territories of the gentiles, leaving a few for service occupations.
This is just too surreal for dull-brained wishful thinkers. And so, they will continue to allow themselves to be led to the slaughterhouse, then slaughtered without mercy. They will stand and mutter, "this can't be happening". That is, unless the depopulation is done by nuclear warfare, in which case a great many of them will perish before the thought ever crosses their very limited minds.
Anyone with half a brain can see that all the manipulation is being done to purposely and intentionally deliver virtually all wealth into the hands of very few. Glad I'm not the only human being on the planet who can see what is happening right in front of our eyes.
PS: Their intention is to have robots provide whatever services they need. I suspect that's the only reason they've put off mass extermination. They don't want to risk having even a few productive human beings left alive after the extermination. After all, it will be just about impossible to deny what just happened, and they don't want any of their producer-slaves looking for revenge.
Yep, the Myth of the Unintended Consequences. I wonder how many are really unintended.
Technology should enable control of the slave population.
Robots will continue to do more of the work. Robots can also be biological too. They're also self-replicating. It may be cheaper and easier to manipulate DNA rather than build electromechanical devices.
The slaves are already being disarmed. Their mental conditioning is nearly complete. It's noteworthy that the oligarchs are NOT being disarmed.
Nuclear war is too messy and there's the danger that some of the oligarchs might be killed, so I don't see a large scale one being very likely.
The big problem for the oligarchs now is other oligarchs. They're greedy and evil and they don't trust each other (as they shouldn't).
Said by a card-carrying member of the Pinko Commie Fascist Movement. Go to North Korea where the likes of you will be mutual. You are NOT an American...
Said by a card-carrying member of the Pinko Commie Fascist Movement. Go to North Korea where the likes of you will be mutual. You are NOT an American...
"We will be stuck in this economic lull until the Fed is ready to admit defeat and allow for a new more effective strategy to be implemented."
Doesn't that have to wait until after the next crash? The FBI warned congress of massive mortgage fraud in September 2004. Greenspan then praised bankers in 2005, for getting people into homes they otherwise could not afford. After the crash, he pretended that he thought the bankers would have been more responsible.
Yellen is making excuses for screwing over savers, the middle class and the poor. She said savers wear many hats, so tough carp for them. She said the poor need to build up assets, with 46 million on food stamps.
The FED isn't going to admit defeat- to Yellen it is obviously the fault of the middle class and the poor that they are doing so poorly.
The FED is not interested in effective strategy. The FED is interested in its own power and fellow bankers.
Simon Says:
Re-establish the militia of the several states, repeal the 17th, 16th and end the Fed.
Easy Peezy.
Simon sez... sounds easy and sounds nice.
Simon realizes... the predators don't obey anyway.
Nonetheless, thumbs up for the pleasant thoughts.
NOTW777:everyone still missing the big question - who gave the fed the right to jam the stock market-
no legal or moral basis whatsoever and look at the deficit and monster debt
Let me help you out here.....
https://www.youtube.com/watch?v=XvCP5C8LE4k
If it is about contagion then it is about derivatives! The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy.
QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. In postponing this collapse the Fed has created a whole slew of new problems. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
"We will be stuck in this economic lull until the Fed is ready to admit defeat and allow for a new more effective strategy to be implemented."
There won't be a new strategy until we get rid of the Fed.
End the FED ( Sounds like I heard that from Ron Paul when I was 5 years old) Kinda late now.
End giving money to the US Government - Does not matter now they can just print what they want electronically.
What will come first ?
The Death of George Bush Senior or His "Big Idea- A New World Order"?
The world is like a Issue of MAD Magazine - Pure Joke.
Sooner or later the pain of inflation will exceed the pain of stopping QE and QE will stop or the people will simply abandon the dollar, but maybe only after hyperinflation.
I don't think the Fed's intent is to hyperinfate. They just want to reduce the real burden of the debt by a large fraction through inflation, somewhere between 50% and 90%. It worked in the 1970s. Then there may be a currency reform and QE brought to an end, followed by a major deflation. There will be lots of risks along the way -- secessions, civil war, revolution, conquest by a foreign power, etc. Let us hope for the best, debt defaults and trials for the financial wizards who got us into this mess.
The FED is fundng the stock market because they can. The FED does not have a plan, and the market participants don't either. Financial
limbo works just as well for the ruling 1% as it does for the poor unemployed on food stamps. Sooner or later they will realize that they will never be able to correct the so-called market 'fundamentals' to a
point where the markets return to a semblance of normality. There is nothing normal about fraud en masse USA. In less than one second the USA lost everything. What is not so obvious to everyone is that you don't get a do-over or second chances when you are the most corrupt nation this world has ever known in history. The greed of Wall Street and American corporatists is their collective undoing, thank God!