Beranke Speech - A Prelude To QE 3
Yesterday, the masterful, and ever so effervescent and optimistic, Ben Bernanke addressed a group of bankers in Atlanta on the state of the economy and his views of what the near term future looks like. To wit:
“…the economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established…"
"As I have explained, most FOMC participants currently see the recent increase in inflation as transitory and expect inflation to remain subdued in the medium term. Should that forecast prove wrong, however, and particularly if signs were to emerge that inflation was becoming more broadly based or that longer-term inflation expectations were becoming less well anchored, the Committee would respond as necessary. Under all circumstances, our policy actions will be guided by the objectives of supporting the recovery in output and employment while helping ensure that inflation, over time, is at levels consistent with the Federal Reserve’s mandate.”
There are several issues with the statements that he made in general that need to be addressed. First, record monetary stimulus at this point has proved mostly futile. Furthermore, each dollar of monetary stimulus is having a diminishing return on the economy itself. The main failure of the current administration and the Federal Reserve is to acknowledge that this is NOT a normal business cycle recession that we have witnessed post-World War II. This is an all out balance sheet recession that requires time and the deleveraging of the entire economic system after three decades of a drunken spending spree.
The problem, as we have addressed many times before and in our recent article on "A Structurally Manageable Debt Level" is that until the leverage on the balance sheet of the average consumer is brought back to a sustainable level where savings and productive investment can return to healthy levels; all of the monetary stimulus in the world will not cure the problem.
Furthermore, unemployment is not cured by monetary stimulus either. Unemployment is only cured by have the consumer create demand for products and services. If the consumer is unable, or unwilling, to spend due to a lack of job, lower wages, lack of mobility, etc. then the incremental demand on business is non-existent and they will not hire.
Bernanke's Speech A Prelude To QE3
Last summer, about this time, QE 1 was coming to an end. The economy was humming along at about 3.1% annualized growth and the stock market was rising. It looked like a success for QE 1 as everything had responded to the stimulus injections from the March 2009 abyss. However, as QE 1 ended the economy slipped to 1.7% growth and the stock market plunged by almost 20%. The reality quickly set in for the Fed that the economy was surviving on the stimulus pump and no real organic growth was occurring. Quickly, Ben and friends, leapt into action and applied QE 2. The stock market responded just as you would expect since market participants have been trained to buy stocks when the Fed is injecting the system with liquidity. However, this time the economy only anemically responded and then faded.
So, here we are today, going into the end of QE 2 with a 1.8% annualized growth rate in the economy, the market sliding already and Ben saying that the "economy is still producing at levels well below it's potential." The last time that we had two pauses after a recession had ended - we were quickly back in a recession. This was back in the early 80's as Volker and Reagan were combatting high inflation and interest rates.
As I said previously, this is NOT your ordinary manufacturing/business cycle where recessions occur on average about every 6-8 years. This is a balance sheet deleveraging cycle and during these cycles recessions occur much more frequently. In fact, had it not been for the Fed injecting the system with another round of heroin (QE 2) the economy would already be in a second recession. (However, the majority of "average Americans" will argue that we never left the first
Ben Bernanke WILL invoke another round of stimulus at some point and will very likely change his target from driving up asset prices to create an "artificial wealth effect" to promote consumer spending to just effectively suppressing the yield curve to keep the economy from screeching to a halt if interest rates rise. With high hopes of economic recovery in the second half of the year, although expectations of 4% growth are now being ratcheted down to 2.5-3% which is really going to play havoc with the Administration’s recent projects of deficit reduction estimations, with the manufacturing indexes, employment and spending all now showing significant signs of weakness it is only a function of time before the liquidity team is tapped for a new idea, especially, going into an election year.
It is pretty amazing to think that after several trillion dollars of injections into the system, a tripling of the Fed balance sheet, a $1.6 trillion dollar deficit and $1.5 trillion in bank reserves – we have not established an economic recovery.
Maybe it’s time to put a different team on the field.