Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Where Is QE2 Taking Us?

Interest-Rates / Quantitative Easing Mar 28, 2011 - 09:36 AM GMT

By: Robert_Murphy

Interest-Rates

Best Financial Markets Analysis ArticleFive months into the second round of quantitative easing — "QE2" — it is useful to take stock of what it has, and has not, accomplished. In short, the monetary base is way, way up, price inflation is up, long-term interest rates are up, and bank lending is down. QE2 has thus begun to deliver on all the dangers of which the critics warned, but not the alleged benefits.


Defining QE2

On November 3 last year, the Fed satisfied the expectations of many analysts by promising another round of asset purchases:

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. (emphasis added)

Five months later, we can assess some of the major results so far. Of course, just because something occurred after QE2 doesn't mean it was the result of it, but it will be instructive to test the claims of the Fed's apologists.

The Monetary Base Has Exploded Yet Again

The Fed was true to its word: It promised it would (electronically) print new money with which to buy government bonds, and it did so. The monetary base has once again zoomed upward since the implementation of QE2:

In the chart above, the monetary base (which I define in this article) surges three times: first in late 2008 when the crisis hit, then in March 2009 with the initial round of quantitative easing, and finally in late 2010 with QE2.

The explanation here is quite simple. Since the onset of the crisis, the Federal Reserve has added more than $1.5 trillion in net assets to its balance sheet. Bernanke didn't get the money from his piggy bank. On the contrary, the Fed simply created new electronic money "out of thin air" by writing checks on itself when purchasing the assets.

It is this infusion of new base money that has many people worried about crashing the dollar. In normal times, commercial banks would create new loans of many multiples of the Fed's injections. Defenders of Bernanke say that he can change course on a dime, and that he has several "exit options" available when the time is right, but I have my doubts.

Price Inflation Is on the Rise

The Austrians have a sophisticated critique of central-bank intervention, arguing that it distorts interest rates and the capital structure, fueling the boom-bust cycle plaguing modern market economies. In contrast, when the man on the street learns of Bernanke's unprecedented money-pumping, his immediate fear is "inflation!"

Since the beginning of the Fed's intervention, some prices (such as gold and other commodities) began rising sharply. Over time, the price hikes have filtered out into a broader field. Gasoline prices are currently at a record high for this time of year. The Producer Price Index (PPI) for all commodities grew by 4.8 percent in the four months since QE2 was launched (the latest data are from February), which translates into an annualized increase of about 15 percent. Even the relatively tame Consumer Price Index (CPI) grew by 1.1 percent in the four months after the start of QE2, which works out to an annualized growth rate of 3.6 percent.

Ironically, the people who praise QE2 for "working" simultaneously claim that it raised inflation expectations while not causing inflation (by which they mean "rising prices"). See for yourself in this recent Bloomberg article criticizing Ron Paul:

The next time Federal Reserve Chairman Ben S. Bernanke appears before Congress, here are a few visual aids he can use to show critics that quantitative easing is working:

The Standard & Poor's 500 Index of stocks has climbed 18 percent since he said Aug. 27 that additional asset purchases might be warranted.

The risk premium on high-yield, high-risk bonds has narrowed to 5.16 percentage points from 6.81 percentage points, Bank of America Merrill Lynch index data show.

Inflation expectations have jumped by 44.4 percent. …

So much for 2008 Republican vice-presidential candidate Sarah Palin's assertion that the "dangerous experiment" wouldn't "magically fix economic problems."

Quantitative easing "was a key factor in taking deflation risk off the table," said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. "It certainly helped bolster longer-term inflation expectations. …"

The Fed's Nov. 3 decision to buy $600 billion of Treasury securities through June … sparked the harshest political backlash against the central bank in three decades, with Republican lawmakers warning the additional stimulus risked causing a surge in prices. So far, they were wrong. (emphasis added)

Long-Term Interest Rates Didn't Fall

Although there is some debate among economists over whether a "successful" QE2 would have led to falling or rising interest rates, it's definitely true that the conventional financial-press account runs like this: by buying longer-term bonds, the Fed would push down interest rates even further out on the yield curve, thus providing more stimulus to the economy even as short-term rates were smack against the zero bound.

If that is indeed the rationale for QE2, it's hard to reconcile with the actual course of the yield on 10-year Treasuries, which seemed to do just about the opposite:

As the chart indicates, the yield on 10-year Treasuries was steadily declining until QE2 was launched, at which point it marched steadily upward for several months before dipping again.

It's true that in economics there are always a million things changing simultaneously. For example, the surge in interest rates could reflect investor optimism about economic growth after the election returns (perhaps because they expect a divided government after the Republican shellacking). Or, the budget deal between Republicans and Obama — with its huge increase in the federal debt — may have been the chief culprit in the surge in interest rates.

But even so, it is important to realize that long-term interest rates did not fall after the formal announcement of QE2.

Bank Loans Are Still Falling

We come now to the last (popular) justification for QE2: that it would loosen the credit markets and get banks lending again. Here too the data tell a different story:

As the chart shows, total lending actually peaked in late 2008 (right when TARP and the Fed's "rescue" programs kicked in), and has fallen ever since.

The apparently sharp upswing in early 2010 is an illusion, due to a Fed change in accounting for consumer loans.

Admittedly, if we just focus on business loans, they bottomed out and slowly began rising after QE2 was launched, but the continued decline in consumer loans more than offset this rise.

Conclusion

With job creation remaining scandalously sluggish, and housing sales still on the skids, about the only thing we can say with confidence is that QE2 has stuffed hundreds of billions into the pockets of the friends of Bernanke.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2011 Copyright Robert Murphy - 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Mehdad
30 Mar 11, 05:39
QE1,2,3,...

Apparently, these un-elected bastards have been given a free hand to do whatever they like. The real question should be how the people can be empowered to throw these bums out.


B.
30 Mar 11, 09:03
Yup, Bill Dudley Bailed Out His Friends When He Turned Bernanke's Head.

Then he treated us to some Goldman Sachs psycho-babble about how it would be good for us all. You are dead on sir, QE doesn't do much except stoke the speculative juices and even if higher financial asset prices sounds like a good idea, it sure hasn't done much for the economy.


Post Comment

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

6 Critical Money Making Rules