"The welfare of humanity is always the alibi of tyrants" - Albert Camus

Tuesday, May 24, 2011

Farewell QE2, We Hardly Knew Ye

The good news is that Fed Chairman Bernanke has announced QE2 (Quantitative Easing 2) - also known as deflating the dollar or monetizing the debt among economic realists - will be winding down over the next few weeks.

The bad news is that not only infusion of the $600 billion in to the economy has not worked despite Bernanke's assertions to the contrary, but a QE3 may be on its way if the charlatan wing of the Fed (not all Fed governors favor QE) headed by Bernanke has its way.

I wrote about this very subject in the American Thinker over six months ago and I will reiterate my sentiments:  QE could not have possibly worked, and thus it did not.  It had failed miserably before in Japan, the Euro zone, and the U.S.  However, ignoring history is a weakness of elitists like Bernanke everywhere. 

I said QE2 would devalue the dollar and cause dollar based commodity bubbles.  It did. 
I said QE2 would not spur significant economic activity or, as a consequence, much additional employment because we did not have a credit availability problem but rather a confidence problem.  It did not.
And no, I am neither a nobel prize winning economist or a wizard of sorts.  It is all common sense and cursory knowledge of macro economics as well as history.

More specifically, just how miserably did QE2 fail?  Lets compare before and after data for key areas of jobs, housing, GDP growth, and inflation.

Depending on how generous one wants to be with squishy numbers (and I am being generous to the ill-fated plan), QE2 created around 700,000 jobs at a cost of $850,000 each.  I can easily argue that these jobs would have been created with or without QE2 as the recession officially ended two years ago, but I won't.  But wait..., there is more to the employment picture.  Although total full-time jobs went from 111.8 million to 112.5 million during the implementation of QE2 according to the Labor Department data, number of part-time workers is down by 600,000.  Translation: 85% of the gain in jobs is simply shifting of part-time jobs to full-time jobs. 
All together now: can you say $6 million per net new job?!
Oh, by the way, the participation rate (percentage of working age population actually working) is lower by .5% compared to August 2010 - lowest in 28 years.

How about housing - the backbone of our economy and the cause of our economic woes?
Well, the news there is not great either.  Housing prices are actually lower today than they were at the beginning of QE2.  According to the National Association of Realtors, average existing home price today is 8% lower than when QE2 was initiated less than a year ago. 

QE2 must have, then, at least spurred economic growth, right?
Wrong.  Economic growth has been anemic and on a downtrend.  Last summer, GDP grew by 2.6%.  The latest quarter indicates the growth in GDP to be 1.8%.

How about inflation, which I predicted would result as a result of QE2?
Well, that is significantly higher at over 3% excluding the all-important food and energy prices (over 10% including them!)  Last summer the same inflation figure was at 1.2%.

Instead QE2 created an artificial boom in dollar denominated commodities from gold to oil as well as dollar based financial instruments.  When so much excess liquidity is pumped in to a market where neither consumer nor business confidence exists, this is the inescapable result.  As the dollar loses its value, prices inevitably go up.
Take the stock market.  The S&P has increased by a whopping 26% since last August.  However, if you measure the increase in most other currencies (or by gold prices), the real increase shrinks to between 4 and 8%.

The truth is simple as likes of Nouriel Roubini, Bill Gross, and Peter Schiff see it.  Artificially increased liquidity only debases the currency and creates inflation.  The only meaningful growth can come about when consumers are confident enough to lift self imposed restrictions and businesses confident enough to invest for future.  The first without the second is impossible and consequently the Obama Administration's abominable track record in imposing punitive regulations on businesses will allow neither!

Is this the right track Bernanke meant when he said QE2 has left the economy “moving in the right direction”?  Right direction towards where? Dismantling of the U.S. economy?

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