Posted on February 18th, 2011
Quantitative easing 2 was explicitly intended to boost the economy through three channels: First it was supposed to increase bank reserves and the monetary base (reserves+ currency), inducing the banks to increase lending. However, much of the injected reserves somehow found their way into Treasury deposits at the Fed (which are not bank reserves), so the monetary base today is no higher than it was in Feb. of last year. (Chart 1).
This would have been an interesting subject to discuss if it were not for the fact that excess reserves, i.e. reserves not used for lending, are over a trillion dollars. (Chart 2). Clearly, if the banks hesitate to lend it is not for lack of reserves but due to shortage of capital and the fact that they are shell shocked by events in the past couple of years. As a result, the funds injected by the Fed that did accumulate in bank reserves just added to excess reserves. (Charts 1, 2)
The second avenue for quantitative easing to boost the economy is by reducing intermediate and long term interest rates, and particularly mortgage rates. But while the purchase of bonds by the Fed tends to increase their price and reduce yields it also increases inflation expectations. And against the background of huge budget deficit, commodity prices that are shooting up and high inflation rates in the developing world it is no surprise that the latter has been the dominant result. (Chart 3). As a result mortgage rates increased 80 basis points and the rate on 10 years treasuries – – the regularly auctioned note closest in duration to 30 year mortgages- – increased over one percent. (Charts 4, 5).
A third way of helping the economy by quantitative easing – – and one strongly emphasized by Bernanke- – is by increasing public confidence in the economy, be it consumers, investors, lenders and any other sector. On that, however, see below.
Quantitative easing could also boost the economy by weakening the dollar and raising stock prices. These were not explicitly stated as objectives of the operation because the Fed is not supposed to manipulate these markets but they were mentioned in the FOMC minutes.
As for the dollar, the FOMC worried about “unwanted” depreciation. In fact, the dollar declined by almost 5 percent between Bernanke’s announcement of his quantitative easing plans in Jackson Hole and the FOMC decision to initiate the plan but hasn’t changed since. (chart 6). This, however, is not due to lack of impact of the program but to the inherent weakness of the Euro and the manipulation of the Yuan. The stock market, on the other hand, started a strong rally after Jackson Hole that has continued to date. It is difficult to dissect all the influences on the market but it is clear from observing the market at the time and from the discussion above that at least the first leg of the up move – – to the beginning of the easing – – was motivated mostly by psychology. Investors simply looked at past experience in QE1 and in Japan and were encouraged to buy. (chart 7). Other factors, such as an improvement in the economy, strong economies of the developing world, strong fiscal stimulus, the shift of Obama after the elections from left to center and yes, even the statement by the Fed that it will follow a policy intended to raise inflation, have all joined to push the market higher.
All told, it appears that the stock market rally is boosting the economy more than the other way around, and the economy still needs a strong push by policy. Given that some major structural problems – – mainly in the state and local government budgets and in the housing sector – – have not been seriously addressed, the European problem still unresolved and rising commodity prices, inflation and interest rates in the developing world, the US and world economy are still highly unstable. But the continuing process of increasing productivity in the US can keep corporate profits rising and drive the stock market to new highs, possibly after a more serious correction that is long overdue.
Posted on November 24th, 2010
When the employment report for September was published it was generally perceived as showing that the U.S. employment situation is not improving or actually worsening. The contrary conclusion could however be reached from employment data from the household survey (See Employment Is Rising Fast) and from other indicators (See Follow up: Employment Is Growing Fast). On that basis one could also conclude that the stock market will break out of its three months trading range on the upside.
The October employment data indicated that our interpretation was right. Not only was the increase in payrolls (+151,000) much larger than average expectations, but prior months data were revised up (+110,000). More recent data also point to a stronger economy. Thus, the latest PMI index (Oct) and Philadelphia Fed manufacturing index (Nov) were up (chart 1). The Fed manufacturing production (Oct) and the Chicago national activity index (Nov) increased (chart 2) and most other regional Fed surveys were up. Retail sales were also stronger than expected. Finally, initial unemployment claims recently broke to the downside (chart 3). (more…)
Posted on September 28th, 2010
One of my readers, Dr Dov Frieshberg, sent me a surprising explanation to what I have observed in the employment data [Employment is rising fast], [Follow up]. According to CNNMoney, the manufacturing sector that had been shrinking for years is responsible for the speed-up in hiring this year, a fact confirmed by the ISM surveys. And you thought only China can produce goods in the global economy…
Posted on September 21st, 2010
Payroll employment data from the establishment survey show employment growth in the private sector of less than 100,000 per month this year, leading to the conclusion that the economy is growing too slowly to reduce unemployment. In contrast the data from the less publicized household survey show employment in the private sector growing this year at almost 300,000 per month. Last month it soared 891,000 thousand.
As noted before in [Employment is Rising Fast] around economic turning point the household data are more reliable and usually lead the establishment data. For example, in seven out of eight turning points associated with the last four recessions — four downturns around the beginning of the recessions and four upturns around the ends of the recessions and the beginning of the recoveries — the peaks and troughs of the household employment data preceded the corresponding peaks and troughs of the establishment employment data.
Posted on September 13th, 2010
As is well known, the U.S. economy came out of a deep recession about a year ago but growth has been slow. As a result, payroll employment has increased this year by less than 100,000 a month, less than half of the rate necessary to start reducing unemployment. The Democrats, facing large losses in the upcoming elections, are therefore devising programs to spur employment, including the small business aid now being pushed in Congress and the newly proposed infrastructure plan.
While all of this is common knowledge, it is at least not really the whole picture: The monthly payroll employment data come from the establishment survey. The latest figure for August showed an increase in employment in the private sector of 67,000. Less publicized are the employment data from the household survey. These tend to be more reliable around economic turning points, such as in a recovery from a recession. They also tend to lead the payroll employment turning points (Chart 1). (more…)
Posted on September 7th, 2010
Employment in the US does increase
Translated from Globes 07/09/2010
Undoubtedly the US economy has rebounded from a harsh recession about a year ago, yet the economic growth rate is so low that employment in the private sector in increasing only by a few dozen thousand employees every month. Since a monthly increase of over 200,000 employees is required just to catch up with the growth rate of the work force, unemployment isn’t diminishing.
Posted on August 29th, 2010
An extreme dichotomy exists in the American economy today. On the one hand, there is the corporate sector that has seen company profits rise sharply in the past year, with companies undergoing an additional round of increasing productivity, raising capital and increasing liquidity, and in which management is showing confidence. On the other hand, the household sector has only gotten back a very small amount of what it lost in the crisis on housing and in the stock market: unemployment remains very high; job security is low; pensions are depleted; and credit is tight. Their sentiment measures are beginning to fall.
Economic forecasts, too, are suffering from a similar dichotomy. While most forecasters are predicting growth over the middle term of 3% or a little more before the latest employment data came in, and a little less after the data, others are predicting another recession, or even a depression. In my opinion, the probability of a double dip is still less than 50%, but that number is going up weekly, due to erroneous world economic policies in general and those of the U.S. in particular. Even now, the probability of a crash is too high to delay taking additional fiscal and monetary policy steps.
Posted on January 31st, 2010
- Loss of confidence in the Euro
- Loss of confidence in the $US
- Loss of confidence in the Yuan
- Loss of confidence in the Yen
- Loss of confidence in all paper money
- A decline in the value of fixed income assets
- A rise in the price of assets that can be expected to keep at least part of their value (gold, real estate) or produce rising income to compensate for at least part of loss of value of the currency (tips and eventually even stocks) .
While any part of this scenario does not have a very high probability, it is certainly too likely at this time for investors to ignore its indicators or to not prepare for it. And some of the markets (e.g. Gold, Oil, and bonds) seem to indicate that not all investors are oblivious to it.
Posted on May 25th, 2009
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