Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
SPX/Gold, Long-term Yields & Yield Curve 3 Amigos Update - 22nd Jun 18
Gold - How Long Can This Last? - 22nd Jun 18
Dow Has Fallen 8 days in a Row. Medium-long Term Bullish for Stocks - 22nd Jun 18
Trouble Spotting Market Trends? This Can Help - 22nd Jun 18
Financial Markets Analysis and Trend Forecasts 2018 - A Message from Nadeem Walayat - 21st Jun 18
SPX Bouncing Above Support - 21st Jun 18
Things You Need To Know If You Want To Invest In Bitcoin Now - 21st Jun 18
The NASDAQ’s Outperformance vs. the Dow is Very Bullish - 21st Jun 18
Warning All Investors: Global Stock Market Are Shifting Away From US Price Correlation - 20th Jun 18
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Cutting the Payroll Tax Will Kick-start the U.S. Economy

Economics / Economic Stimulus Oct 18, 2010 - 10:44 AM GMT

By: Mike_Whitney

Economics

On Friday,  Fed chairman Ben Bernanke made the case for a second round of quantitative easing (QE) claiming that inflation is presently "too low" to achieve the Fed's dual mandate of price stability and full employment.  By purchasing long-term Treasuries, Bernanke hopes to lower bond yields and force investors into riskier assets. That, in turn, will push stocks higher making investors feel wealthier and more apt to boost spending. (re: "trickle down") When investors increase spending, it reduces the slack in the economy and lowers unemployment. Thus, QE is intended to divert investment to where it is needed and to lift the economy out of the doldrums.


That's the theory, at least. In practice, it doesn't work so well.  Over a trillion dollars in reserves are still sitting on banks balance sheets from QE1. The anticipated credit expansion never got off the ground; the banks loan books are still shrinking.  Bernanke fails to say why more-of-the-same will produce a different result.

QE is also risky, in fact, it could make matters worse.  Unconventional methods of pumping liquidity into the economy can undermine confidence in the dollar and trigger turmoil in the currency markets. Trading partners like Brazil and South Korea are already complaining that the Fed is flooding the markets with money pushing up their currencies and igniting inflation. The threat of more cheap capital is causing widespread concern and talk of a currency war. If Bernanke goes ahead with his plan, more countries will implement capital controls and trade barriers. The Fed is clearing the way for a wave of protectionism.

 Quantitative easing, which is essentially an asset swap--reserves for securities--will not lower unemployment or revive the economy. Low bond yields won't spark another credit expansion any more than low interest rates have increased home sales. The way to tackle flagging demand is with fiscal stimulus; food stamps, state aid, unemployment benefits, work programs etc.  The focus should be on putting money in the hands of the people who will spend it immediately giving the economy the jolt that policymakers seek. QE doesn't do that. It depends on asset inflation to generate more spending, which means that we've returned to the Fed's preferred growth formula--bubblenomics.

Quantitative easing is also extremely costly for, what amounts to, modest gains. Consider this, from the Wall Street Journal:

  "The Fed's own internal models suggest that a purchase of $500 billion in Treasurys would only reduce the 10-year bond by something like 15 basis points..... This in turn would increase GDP by 0.2% a year and cut the jobless rate by 0.2%. That's not much bang for a lot of bucks."

Bond yields fell more on Friday in reaction to Bernanke's "jawboning", than they will when QE is actually implemented. That's because Wall Street still thinks Bernanke has superhuman powers and can reverse severe deflation and mass deleveraging with a wave of his hand. But it's not true. When households are repairing their balance sheets, they will not take on more debt regardless of how cheap money is, which is why credit will continue to grow at suboptimal levels. 

 Here's a clip from Bernanke's speech that points out the problem with QE:

"One disadvantage of asset purchases is that we have much less experience in judging the economic effects...these factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of other long-term securities."

Isn't this a tacit admission that Bernanke really doesn't know what he's doing?

Remember, it was Bernanke, who, as late a July 2005, denied that there was a housing bubble. In 2007, Bernanke claimed that the subprime disaster was "contained".  In 2008, Bernanke allowed Lehman Bros. to collapse rather than invoke the Fed's "unusual and exigent" clause which he used willy-nilly for all of the Fed's other so-called “emergency actions”.  So, the Fed chairman already has a number of strikes against him, and now he wants to take the country into uncharted waters. This is not a decision that should be left to an unelected bureaucrat whose policies helped trigger the financial crisis. 

The threat of deflation should be taken seriously, because once it becomes entrenched it can be difficult to root out. But there's no need for experimentation; the remedies are already known (Keynesian stimulus) and have been used many times before with predictable success. The government needs to expand its budget deficits in order to provide sustained fiscal stimulus until household deleveraging ends and consumers can resume spending. The privately-owned banking system will not generate sufficient credit for another expansion because the banks are still impaired and consumers are huunkering down.  It's the government's job to intervene and provide relief where it is needed.

Bernanke should align his bond-buying program with a second round of fiscal stimulus, preferably a two-year suspension of the payroll tax. Instead of inflating equities and commodities, the Fed's liquidity would give the nation's working people a well-deserved raise in pay that they'd use to kick-start the economy. That's the best way to create demand and beat deflation.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2010 Copyright Mike Whitney - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules