Qualitative easing and the Obama recovery

The Federal Reserve Board’s policy of qualitative easing has helped the stock market recover.  But Americans who work in the real economy are still struggling.

Qualitative easing is the Federal Reserve Board’s policy of creating new money to buy Treasury bonds in order to keep interest rates low.  The greater the demand for bonds, the lower the interest rates, and the interest rate on Treasury bonds is generally the benchmark on all Treasury bonds.

The Fed’s Operation Twist was a sale  of medium-term Treasury bonds and purchase of 10-year bonds.  The Federal Funds rate is the interest rate for overnight loans among banks so they can meet the Federal Reserve’s requirement for reserves.

The chart above shows how QE correlated with the ups and downs of the stock market.  But, as I indicated in a previous post, American corporations did not advantage of low interest rates to invest in their businesses.  Instead they have transferred the gains to stockholders in the form of stock buybacks.

An economic recovery has taken place.  Most Americans are better off than they were at the depths of the crash.  But as economic recoveries go, this one has been weak.

The chart shows how important is it to always adjust for inflation.  A dollar in the year 2000 is not the same thing as a dollar in the year 2016.

Although corporate executives did not take advantage of Qualitative Easing to invest in America, there was nothing besides politics holding back the federal government from investing in public works.  There is a lot of urgent work that needs to be done in maintaining and upgrading American’s physical infrastructure, such as upgrading public water systems to get the lead out.

With a lot of public work that needs to be done, a lot of people who need work and financing costs at historic lows, why not put the unemployed and under-employed to work doing what needs to be done?  Fiddling with interest rates and the money supply is not enough.

Quantitative easing didn’t revive the economy

The Federal Reserve System pumped billions of dollars into failing banks by buying up their toxic assets, and pumped up the stock market by holding down interest rates to as near as zero as possible.

This benefited Wall Street and the big banks, but, as the chart above demonstrates, it didn’t help the real economy much.

The top line on the graph shows the amount of money the Fed pumped into the banks.  The next line shows the amount of new money that actually went into circulation.  The third line shows the amount of loans the banks made.  The line in the second chart shows the rate of inflation by the most conservative measure.

A lot of individual savers bought stocks and bonds because their banks wouldn’t give them any interest on their savings accounts.  This would have been a good thing if the money that went into the financial markets had been invested in starting or expanding businesses, but this didn’t happen.

Corporations are sitting on trillions of dollars in cash.  They understand that the speculative boom sparked by qualitative easing is bound to crash.

LINK

The Chart That Explains Everything by Mike Whitney for Counterpunch.

Fed at Fault: What Goes Up Must Come Down on the Deconstructed Globe.

Why Are the Largest Corporations Sitting on Trillions in Cash? by Gaius Publius for Down With Tyranny!

Big Short Genius Says Another Crash Is Coming by Jessica Pressler for New York magazine.

I don’t see how this can possibly end well

The Federal Reserve System has the power to create money, which it puts into the U.S. economy by buying Treasury bonds or other financial assets.   The chart above, which comes from the Federal Reserve Bank of St. Louis, shows how the money supply has more than tripled since Barack Obama was sworn in as President.

Recently Ben Bernanke, the chair of the Federal Reserve Board, announced that the Fed will spend $40 billion a month to buy mortgage-backed securities (aka toxic assets) until employment is back to normal.

The theory behind this is that putting more money into circulation will stimulate economic activity, because banks will increase their lending to American small businesses and consumers.  As economist Michael Hudson (shown in the video in my previous post) pointed out, this hasn’t happened.  The big Wall Street banks have more profitable things to do with their money.  What the Fed’s action does is to relieve the big Wall Street banks of the consequences of the 2001-2007 house price bubble and set the stage for a new bubble.

Another of the Fed’s policies has been to hold down interest rates to virtually zero.  The theory behind this is that Americans will borrow more and this will stimulate economic activity.  The actual result has been to artificially stimulate the stock market by driving money out of bank savings accounts.

Taking myself as an example, I get virtually no interest on my bank account.  This means that as a result of inflation, which is low but not zero, my savings are worth less in real terms than they were at the beginning.  This creates an incentive to venture out into the financial markets.  But since stock prices are being lifted by something other than the perceived value of the companies issuing the stock, there is bound to be a fall.

One cause (or definition) of inflation is too much money chasing too few goods.  During the past three years, the Federal Reserve System has more than tripled the amount of U.S. dollars, but this has not gone into increased production of U.S. goods.  Inflation is low in historic terms, but there is no guarantee this will continue.  I don’t see how this can possibly end well.

Click on QE Forever for analysis by Robert P. Murphy in The American Conservative.

Click on QE3: Another Fed Giveaway to the Banks for analysis on the naked capitalism web log.

The “monetary base” is spendable money, including cash and coins, bank accounts and money market funds.  There are other measures of the money supply, which include bank savings certificates, Treasury bonds and certain other kinds of financial assets.