INTRODUCTORY COMMENT: THIS PAST WEEK THE US CENTRAL BANK, THE FEDERAL RESERVE, ANNOUNCED ITS THIRD ITERATION OF DIRECT MONEY INJECTION INTO THE ECONOMY, CALLED ‘QUANTITATIVE EASING’ (QE3). THIS THIRD FED MOVE WAS PREDICTED BY THIS WRITER LAST DECEMBER 2011 (see my article, ‘Z’ magazine, January 2012, ‘Economic Predictions: Present and Future’), EVEN THOUGH THE FED AT THAT TIME (December 2011) HAD JUST INTRODUCED ITS PRIOR ‘QE 2.5’ PROGRAM, CALLED ‘OPERATION TWIST’. BUT QE PROGRAMS MOSTLY BOOST STOCK & BOND MARKETS, DERIVATIVES TRADING, COMMODITIES, AND OTHER SPECULATIVE FORMS OF INVESTING–AND HAVE VERY LITTLE EFFECT ON THE REAL ECONOMY, HOUSING, OR JOB CREATION. READ BELOW WHY THE LATEST ‘QE3′ WILL HAVE THE SAME NEGLIGIBLE EFFECT AS ITS PREDECESSOR QEs BUT WILL, LIKE QEs BEFORE IT, AGAIN BOOST INVESTORS’ PROFITS STILL FURTHER.
Last Friday, Sept. 14, the US Federal Reserve announced its latest version of massive liquidity (money) injections into the US banking system. Called ‘Quantitative Easing 3’, it follows earlier QE1, QE2, and QE2.5 money injections, that already amounted to $2.75 trillion of direct purchases of mortgage and other bonds from investors by the Fed, since early 2009 nearly four years ago.
The Fed’s immediately preceding QE 2.5 program introduced in 2011 (costing $400 billion) had not yet finished and the Fed nevertheless announced its latest successor version, QE3. Even potentially more generous than its predecessors, QE 3 will be an open ended tab of free money to banks and investors, amounting to $40 billion a month for an undetermined number of months to come. It could therefore be an even greater subsidy to banks and investors, in terms of magnitude, than previous QEs.
The Fed and the US press reported the new QE3 as necessary to boost the stagnant labor market in the US today–which has not been able to create jobs sufficient to even absorb the entry of new workers into the labor force–and to boost the housing market that continues to languish for years now at depression levels. True unemployment today hovers around 23 million, where it has remained consistently now for several years. Housing continues to ‘bump along the bottom’ in terms of nearly all indicators, as it also has for the past three years.
But QE3 will have no more effect on job creation, housing, or general economic recovery than has its predecessor QEs. QE is not about boosting jobs, housing, or the real economy. QEs are about subsidizing investors and boosting stock, bond, derivatives, and commodity futures markets and therefore the capital incomes and returns of investors, both individual and corporate.
In my article written last December 2011, ‘Economic Predictions; Present and Past’, which appeared in the January 2012 issue of Z magazine (and is available on this blog and on my website, kyklosproductions.com accessible from this blog’s sidebar), I predicted nine months ago that even though QE 2.5 (called ‘Operation Twist’) had just been introduced by the Fed last October–it would be followed by a subsequent QE3 sometime in 2012.
This prediction was based on the analysis last November, appearing in my April 2012 book, “Obama’s Economy: Recovery for the Few (also available this website), in which I showed data indicating an extremely high correlation between the introduction of QE programs and surges in stock and other financial markets: i.e. when markets begin to falter, QEs are introduced, and markets surge once again. Table 5.1 on p. 90 of my ‘Obama’s Economy’ book shows that as soon as the stock market begins to slow and decline, another QE is introduced. Following that introduction, the stock market takes off once again. When the QE in question begins to conclude and wind down, the stock market begins to falter once more, leading to talk again and eventual introduction of another QE–which again results in a resurgence of the stock market. The table 5.1 identified this relationship for QE1 and QE2, which amounted to more than $2.3 trillion injected by the Fed into banks and investors’ pockets, in the form of buying from them various subprime and other mortgages and securities at their full purchase values instead of their current depressed values in many cases. In other words, investors and banks were subsidized as a result of Federal Reserve QE money.injections.
Banks and investors then take this ‘windfall’ from the Fed and invest it into stocks, junk bonds, derivatives, commodities (oil futures being a favorite), emerging markets’ exchange traded funds, foreign exchange futures, etc.–i.e. various speculative financial instruments. Or, in the case of some banks, they just take the money and hoard it. Whether hoarded or funneled off to speculators, the QE injection is not loaned to real businesses to create jobs. In other words, what they don’t funnel offshore, or into financial securities, they just hoard, which now amounts to around $1.7 trillion in excess bank reserves the banks are simply sitting on. Bank lending to small-medium businesses stagnates or even declines. Very few jobs are the result of the trillions pumped into them by QEs that are either hoarded or diverted to financial speculation.
Nor do QE programs have much impact on housing recovery. They may reduce mortgage rates a little, but low rates are not the solution to the lack of housing recovery to date. Banks may publicly report available low mortgage rates but that doesn’t mean banks actually lend at those rates except to a very very small, select group of buyers. Despite low rates, banks the past three years have imposed numerous and onerous non-rate terms and conditions for getting a mortgage loan for most home-buyers. A buyer can get a 3.75% mortgage loan, but only if he puts 40% down, has a perfect 800 plus credit score, excess monthly income, and keep $100k in accounts in the bank’s branch.
So QE means little housing and jobs recovery, does nothing to ensure banks will actually lend to small businesses and consumers, and results either in cash hoarding by the banks or in lending to speculators (hedge funds, etc.) who then use the loan to buy up stocks, junk bonds, speculate in spot oil futures (driving up gas prices at the pump) or industrial commodities, derivatives of all kinds, foreign exchange, etc.
QE is for investors, in other words, not for homeowners or unemployed or small businesses.
Pressure for the Fed to introduce its latest QE3 began this past summer, as the stock market began to lag once again. As it became increasingly possible the Fed would introduce another QE in recent months, the stock market began to surge. And once the Fed did announce QE last week, the markets exploded. The Dow and S&P 500 are today almost where they were in 2007 before the financial crash. Stocks have surged (driven largely by 3 QEs the past three years) by almost 150%–i.e. more than doubled. Junk bond returns have been even greater. We’ve had three oil and commodities price bubbles since early 2009, and unknown fortunes have been made as well from speculative derivatives trading (unknown because they aren’t reported anywhere). In contrast, housing, jobs, and general economic recovery in the US for the rest of the non-investor/corporate population has stagnated, bouncing along the bottom, relapsing three times in as many years (also as predicted in the ‘Obama’s Economy’ book a year ago).
Fed QE policies combined with additional free money in zero interest loans available to banks (called ZIRP) together have totaled more than $10 trillion to date in what amounts to Fed subsidized money given to banks and investors–all of which has been designed to bail out the banks and investor community. But bailing out the banks does not in turn mean that the economy recovers. Bail outs to banks don’t necessary result in lending to businesses and consumers. Why? Because the bail out money is either hoarded (i.e. remains bottled up in the banks in the form of record excess reserves amounting to $ trillions) or is loaned by the banks mostly to professional speculators and investors who realize highly profitable, quick returns in speculative markets (stocks, junk bonds, derivatives, commodities futures, ETFs, etc). The Fed’s QE money injections thus do not produce sustained economic recovery for the general economy.
What we are now beginning to witness, moreover, is a growing further shift by all the major central banks globally toward a greater reliance on QE-like policies as the primary strategy for addressing the continuing slowdown of the global economy. Not just the US Federal Reserve, but the European, Japanese, and UK central banks as well. The US today can barely generate a 1.5% economic (GDP) growth rate and is slowing, Europe is already in a recession that is deepening, and China and other once fast growth economies (India, Japan, Brazil, etc.) are all slowing rapidly now as well. The central banks are preparing to stabilize their private banking systems in anticipation of a continuing global real economic slowdown that promises to make those private banking systems even more unstable.
A growing convergence and coordination of central banks worldwide has thus begun. The European Central Bank, ECB, last week also announced another round of its version of QE as it moves toward trying to become a mirror image of the US Federal Reserve in other aspects as well. The Bank of England will soon do another QE, as it has been waiting on the Fed and the ECB first. As the Japanese economy has now begun to show signs of slowing further as well, the Bank of Japan will follow suit. In other words, central banks around the world are trying to jointly head off another banking crisis pre-emptively to avoid a repeat of 2008. That’s what’s behind the growing coordination of QEs and the continuing massive, money injections by central banks into their private banking systems now growing unstable again by the month.
But QEs, even coordinated, will do little to nothing to stop the slowing of the real economies in the US, Europe, Japan and even China that is now underway. Central bank policies, whether QE or other, cannot stop the real economic slowdown and drift toward another synchronized global recession. QE and monetary policies in general are not a solution because all the money and liquidity in the world can be pumped into the banking system by the central banks and it will still not necessarily result in lending, and therefore investing in jobs, and consequently economic recovery.
The global capitalist system today is becoming increasingly addicted to speculative forms of investing, to chasing quick returns from such investing instead of lending to real businesses that make things, employing real people, and generating real disposable income to drive the consumption necessary for real sustained economic recovery. When not investing in speculative financial securities, banks today are intent on hoarding the cash and, when not doing so, then waiting to do so. Or, if not funneling money into speculators, or waiting to do so, banks may perhaps lend offshore (the US, Europe, Japan) into emerging markets. But the latter are now slowing as well. So increasingly its hoard the QE and central bank cash, or jump in and out of speculative markets to generate quick, short term profits, and/or wait.
What this all means is that there is no shortage of capital today–whether in the US or globally– that could be invested to create jobs and a sustained economic recovery instead of the current slide toward global recession. As noted, US banks alone are hoarding about $1.7 trillion according to reports. Non-bank big businesses (many of which are also in part banks themselves and invest heavily in derivatives, stocks and the like) are hoarding another $2.5 trillion. And US multinational corporations are holding $1.4 trillion in offshore subsidiaries–money that they refuse to repatriate by law to the US and pay taxes on (until, of course, they get another corporate tax cut ‘deal’ from the president and Congress promised by both Republicans and Democrats after the November elections).
The US is not ‘broke’. Neither is the UK, Europe, or Japan. The money is there to invest and generate jobs and recovery. It’s just bottled up by those who have it and won’t spend (i.e. loan or invest) it. Ditto for the Eurozone and Japan. In the meantime, as policies drift toward convergence on the central bank side, so too does it appear a kind of convergence is also taking place–in the US, Europe, UK, and Japan–on the fiscal side in the form of continued fiscal ‘austerity’. (i.e. what is called the ‘fiscal cliff’ in the US). That means cutting government spending on social programs and government investment, selling off government properties wherever possible (privatization), and raising taxes on everyone except investors and corporations.
The significance of the Fed’s QE3 move therefore is there will continue to be free money in unlimited amounts to banks and investors to hoard or to speculate and play with, while it’s cuts in spending and disposable income for the rest of us. But ‘QEs for them’ and ‘Austerity for the rest of us’ will mean continued economic slowdown and recession, accelerating in Europe, more slowly coming in the US, and increasingly on the horizon for even Asia.
Dr. Jack Rasmus
Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”, available on this blog and his website at discount. (see also the new offer for the book with a DVD presentation and 60+ powerpoint slide presentation). His blog is jackrasmus.com and website: http://www.kyklosproductions.com. Follow Jack and his guests on his new forthcoming weekly radio show, ALTERNATIVE VISIONS, on the progressive radio network, every wednesday at 2pm New York time, af PRN.FM, or progressiveradionetwork.com