5/4/2011 11:24 AM ET|
How the Fed made the rich richer
The 'QE2' project was supposed to ease borrowing and get consumers to spend again. Instead, it has benefited only a few while raising most people's cost of living.
Aside from the dramatic killing of Osama Bin Laden, Americans haven't had a lot to be excited about lately.
Just 22% believe the country is on the right track, Rasmussen tells us. According to a new Gallup poll, more than half of us say the economy is in recession or depression, despite the fact that output has been expanding since the summer of 2009. In fact, more of us (29%) say the country is in a depression than say the economy is growing (27%).
There's a good reason for this: As inflation surges at the store and the gas pump, the economy is stalling. And the heart of the problem could very well be the Federal Reserve's $600 billion "QE2" money-printing initiative, which was implemented last November to great fanfare on Wall Street and is set to end in June.
While the program has helped push up the cost of living for all of us -- sending inflation into the red zone and damaging consumer confidence -- evidence suggests its benefits have accrued only to the top tier of the net-worth ladder.
Here's a look at how the Fed went off course -- followed by a few investing ideas to protect yourself from the results.
Cream to the top
Yes, the stock market has posted impressive gains since the idea of QE2 surfaced, with the Standard & Poor's 500 Index ($INX) up nearly 31% from its low last August. And that has pushed up household net worth by $2 trillion. The hope has been that this will translate into new spending and drive the economy forward.
But stock ownership is concentrated among the wealthy: On average, just 12% of households worth $100,000 or less own stocks and mutual fund shares outside their retirement plans -- a group that comprises 74% of the total population. While many more own shares through 401ks and IRAs, they're not in a position to easily tap that wealth for current spending.
At the same time, QE2 has pushed up borrowing costs, pressing down the prices of homes -- a much more widely held asset. The Case-Shiller Home Price Index started falling last summer as the idea of QE2 was floated, and it hasn't stopped since. The broad 20-city index now sits below 2009 levels.
This is a continuation of trends that have been in place since the recession ended in 2009. According to Credit Suisse equity strategist Douglas Cliggott, it suggests the improvement in net worth during the past two and half years "has been heavily skewed towards that relatively small part of the U.S. population that has significant equity holdings."
In other words, the Fed's "stimulus" has made the rich richer, with limited impact in terms of new spending. It's made the vast majority of people poorer, and less able to spend. It's this tradeoff that threatens to snuff out the feeble, three-year-old economic recovery.
Just look at the first-quarter GDP growth numbers released last week. Most people just aren't spending.
The government reported that GDP growth slowed to 1.8% annualized from 3.1% in the fourth quarter -- a dramatic slowdown at a time when both QE2 and the government's payroll tax cut were in full effect. Indeed, Paul Ashworth at Capital Economics was disappointed enough to tell his clients that given all the tailwinds, he had "originally hoped for a lot more."
The drop was due mainly to bad weather, higher energy prices and a decline in consumer spending. The last two of these factors, at least, are set to continue with the budget fight under way and commodity prices still high. Consumption growth slowed to 2.7% from 4% previously -- mainly due to a drop of nearly 50% in spending on goods such as motor vehicles and groceries. Government consumption dropped 5.2%, which whacked 1.1% from overall GDP growth.
Unfortunately, while Fed Chairman Ben Bernanke insisted last week that any negative factors are "transitory," the data suggest otherwise. The Kansas City Fed Manufacturing Composite Index was just the latest regional factory survey to suggest production is slowing. And as I mentioned in my last column, the Citigroup U.S. Economic Surprise Index continues to decline to reflect this slowdown in manufacturing.
All of this hurts the job picture. Weekly jobless claims spiked to 429,000 last week, well above the previous week's 404,000 and the 390,000 that analysts were expecting. Current levels were last seen in January. Not only does this point to trouble in the April job report due out Friday, but it breaks a long downtrend from last summer that suggested economic healing.
A flawed idea from the start
I can't say I'm surprised. Last November, I wrote that QE2 threatened a repeat of the "Great Inflation era" that started in 1964, lasted 20 years and didn't end until inflation was at 15% and interest rates at 22%. In "Hiking inflation won't help, Ben," I wrote:
"It seems strange to have this discussion more than a year after the recession officially ended, after corporate profits have returned to pre-recession peaks, after the economy has created 1.6 million new jobs and after personal income has moved to new highs."
There was no credit panic. Interest rates were not high. There was not a lack of liquidity. But the concern was that inflation was too low and job growth too slow. So the Fed decided to push another $600 billion worth of cheap cash into the financial system by buying back bonds, despite the fact that the banks were holding nearly a trillion dollars in "extra" cash in their vaults.
Bernanke himself, when he introduced the idea of QE2 at a central bank gathering in August, said the maximum benefit would be seen during a period of "economic and financial stress" via a lowering of borrowing costs for businesses and households. Only later -- after interest rates started rising instead of falling -- did he focus on the idea of raising stock prices as a major goal of QE2.
The decision-making was flawed.
As I wrote back then, inflation was pushing off its lows and moving higher. Bond market activity was suggesting a very low chance of sustained deflation, a deeply feared cycle of falling prices. And early indicators of economic growth were improving. Job growth -- while slow because of structural issues the Fed cannot solve -- was reaccelerating.
While it's true that stocks sold off last summer on European debt fears, the ability of businesses to borrow cheaply in the bond market and use the cash to buy back shares or engage in merger-and-acquisition activity was keeping the economy moving and funneling cash into stocks. Interbank lending rates -- a key measure of stress in the financial system -- hardly budged. It appears that the Fed, encouraged by Wall Street, overreacted to fears of a double-dip recession.
We didn't need QE2. But we got it anyway.
The benefits never materialized
We haven't gotten the promised results, however. We are more than $400 billion into QE2, and the benefits that helped secure popular support for the move have not arrived.
We have not gotten lower borrowing costs. Instead, expectations of higher inflation have pushed interest rates higher. That has pushed up the cost of credit cards and of mortgages, damaging the fragile housing market. From a low of 2.5% in November, 10-year Treasury bond rates stand at 3.3% now after spiking to 3.8% in February. Banks, instead of easing their lending practices, have squirreled away more money and now hold nearly $1.4 trillion in total excess cash.
It's worth noting that those higher interest rates don't reflect rising economic growth expectations, as some of the Fed's defenders have claimed. According to Capital Economics, the "real" or inflation-adjusted interest rate, which reflects economic growth expectations, has managed to climb to only 0.8% from the 0.4% low reached in October. Over the same period, inflation expectations have climbed. Translation: Bond traders are looking for mediocre growth and more inflation, not a good combination.
We certainly can't blame rising prices entirely on the Fed. There have been protests and political revolutions throughout North Africa and the Middle East -- tightening the energy supply situation. And there have been droughts and crop failures -- tightening the food supply situation.
But the recent feverish rise of gold and silver has demonstrated that the Fed has dumped enough cheap cash into the system to allow speculators and momentum traders to run amok. And their escapades are damaging the real economy and the financial security of working Americans.
Last November, I spoke with an expert on the Fed, Allan Meltzer, who penned "A History of the Federal Reserve" and served in both the Kennedy and Reagan administrations.
I checked in with him again recently to see if he still thought the move was "foolish." His criticisms have only sharpened. He believes that the Fed's QE2 initiative was "unnecessary and mistaken" and agrees that it has resulted in more inflation, higher commodity prices and a devalued dollar.
Wall Street is also getting worried that instead of being a benevolent force, the Fed's money printing is doing damage. Cliggott, the Credit Suisse equity strategist, summarizes our situation like this:
"So here we are -- a mix of really bad weather, rapid growth in most of the largest developing economies, and political and social conflict in Africa and the Middle East have together conspired to turn what was meant to be a soothing rain of excess liquidity in the United States that would help heal the labor market into some uncomfortably hot inflation patterns that are weakening the real purchasing power of millions of American households."
And now the fallout
So where do we go from here? Last week, I laid out the case for a period of underperformance in the stock market as the negative effects of QE2 filter into the economy. (Read "Investors, it's time to run and hide.") This looks likely to continue, since the program has another two months to run -- keeping pressure on food and fuel prices and consumer spending.
A surge of inflation is likely despite the fact that the unemployment rate is still close to 9% and factory output is well off of its pre-recession highs. Such is the nature of our economic malaise. Remember that high unemployment doesn't preclude higher inflation: Spain's unemployment stands at 21.3% while its inflation rate has increased to 3.8%.
Meltzer believes the Fed is making the same mistakes it made in the 1970s, focusing too much on unemployment while ignoring the inflation threat. The Fed dismisses that threat as transitory and says inflation expectations remain under control.
This is "simply wrong" according to Meltzer, since inflationary pressures reflect real, lasting shifts in the supply/demand balance as countries like China grow and those like Saudi Arabia struggle to feed their growing appetite for resources. And while unemployment is a problem, "it's not a monetary problem."
As a result, the Fed is pushing money into an expansion -- a dangerous and inflationary move. According to Meltzer, "Bernanke has committed himself to this. He doesn't want to admit he's wrong and he's dragging others with him."
I've recommended that readers start taking risk off the table and focus on defensive assets -- such as the iShares Barclays 20+ Year Treasury Bond Fund (TLT) -- as traders begin to discount a slowdown in GDP growth and the hit to consumer spending that will result. That will tend to lower stock prices.
I've also recommended some outright shorts to my newsletter subscribers, betting that some emerging-market and energy stocks will go down. The latest is Indian lender ICICI Bank (IBN, news) -- which is hurting as foreign central banks raise rates and choke growth to dampen global price pressures created by QE2. Former energy sector high-flier ConocoPhillips (COP, news) also looks very attractive on the short side as it drops out of a three-month range on heavy volume as crude oil drops on concerns about economic growth.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company or fund mentioned in this column. He has recommended ProShares UltraShort MSCI Emerging Markets and ProShares UltraShort Oil & Gas, as well as short positions in ConocoPhilips and ICICI Bank, to his newsletter subscribers.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
VIDEO ON MSN MONEY
Of course the super rich got richer. Our national wealth has become more and more concentrated over the past 30 years. Today, the 400 wealthest Americans control the same amount of wealth as our poorest 150 million citizens. The aristocracy buys the politicians who provide the ongoing tax breaks for the wealthy. The shrinking middle class is forced to pay higher property taxes and sales taxes in order to keep taxes low for our wealthest citizens and corporations. That is why most of us work hard our whole lives and have little to show for it.
Our 4 biggest banks have 8 trillion in assets and still get billions in 0% loans to play the market and make foreign investments. The federal reserve bank are nothing but an atm of the big rich too rape the people. Bernanke and his gag of thieves need to go.
When you pay 600k for a 200k home and that loan is guaranteed by the government you are robbed. We can no longer afford this socialism for the rich. When both parties rushed to bail out the giant gang of pigs they immediately got 18 billion in bonuses instead of prison terms; At that time Bernanke told a Senate committee to go to hell and he would do what he pleased with the tax payers money. He also, told them that was what they intended.
The people are in bad need of a government. These two parties are owed by banks, wall street, big corporations and blood sucking insurance. If we don't demand real change, we will shortly be in depression and chaos.
pocketprotector: If the $100k a year or more income crowd pays 90% of the total income tax, that means that most taxpayers make over $100k. Once again, I have to explain that it all depends on percent of an individuals income. After itemizing my taxes, I paid 7% tax for 2010. I do not make $100k or more a year. Now if I had been GE, I would have paid ZERO tax, and would have received a 3.2 billion dollar refund. We have the largest welfare for corporations in the world, and socialism for the very wealthy. The numbers don't lie.
The idea of capitalism was for businesses to pay fair wages and employ the population expanding ideas with new growth and having small profits to continue the process.. TRUE Capitalism is dead.. We live in Monopolism much like the English & Europeans of the era when the Revolutionary war began as we tried to escape monopolies and wars designed out of greed.. We have no New World to break away this time... Now they have made laws out of our fears to enslave up and set up the New World Order where the elite live off our blood and sweat and take HUGE profits pretending that that was the idea of capitalism. They invaded our education and teach this to our children.
When anyone speaks of the idea that the wealth of a nation should be spread among the people, these wolves act as if it is socialism or communism... No, It's AMERICANISM & we need to get back to it. It was designed by the people for the people. The constitution protects us from this, but they destroyed it one step at a time. The president can now go to war without the approval of the senate... That's a totaltarian idea.
Wake up and smell the coffee folks... Unless we end the rule of the Dems & Repubs, and create a government by the people for the people, and put out of business the PRIVATE CORPORATION of the Federal Bank, and back our money through the government (Many GREAT leaders spoke against a private institution creating money, Jefferson, Lincoln, Washington), we are doomed.
BY THE PEOPLE FOR THE PEOPLE means that WE, the working class, the laborers, are to control the nation, not the high educated elite with their manipulation and demonization of our nation! Rise up and teach your neighbor the TRUTH so we can have a revolution of no blood shed by VOTING them out by NOT voting for ANY Democrat, or Republican!!
Imagine how it would stimulate the economy if all government guaranteed loans student, home and others were made directly for a small interest rate. That would leave trillions with the people instead of giving it to thieving bankers.
We need to eliminate the federal reserve bank and write off anything they claim we owe. They are nothing but giant leeches that do more damage than all terrorist combined.
So, the Fed making the rich richer should not be any surprise. The Fed is not a government agency. The Fed is a PRIVATELY HELD BANK. Who but the rich own such an entity and why does a privately held bank hold such control over our econonmy and our money???
John Kennedy tried to do away with the Fed and we know what happened to him. It needs to be public knowledge. WHO owns the Fed bank, who is its CEO and who is on its board. We the people having our lives controlled to such an extent by this entity deserve to know.
The article is promoting the idea that the historically low interest rates we have right now are good
and should remain low so that more people can afford homes. The article also complains about the falling price of home values. What is wrong with the housing market is exactly the opposite of what the article states. The problem is not so much affordability but an imbalance between the value of the homes and the interest rates. The banks are not lending because the price of homes is still too high and they don't want to get stuck with more underwater homes along the way. Potential buyers are also not buying because they feel that homes are still overpriced and they are right. Banks are also not lending because the rates on fixed mortgages is too low and in the event of substantial inflation they will not be able to sell the fixed mortgages as in the past because potential buyers of those fixed loans do not want a 30 fixed loan at 5% in their portfolio that is being paid off with devalued dollars. The mortgage holding will essentially lose most of its real value over time because it is being paid off with devalued dollars. The housing market will not turn around meaningfully until home prices come way down and interest rates are allowed to rise to more historical norms. The interest rates are being kept artificially low. This is the same problem of easy money that got us into this mess. You cannot get yourself out of a bad situation with the same type of thinking and actions that got you into that situation in the first place.
"Destroying America" sorry for the typo
Government has the RESPONSIBILITY to maintain A fair, free market economic system and protect ALL people at all income levels! Unfortunately, our current members of the United States Government, The Media, Corporate America, and the Lobbyist/Policy Makers NO LONGER REPRESENT THE MAJORITY OF AMERICAN CITIZENS(MIDDLECLASS). They have used their positions of so called "leadership" to suck up all the true wealth in this country for themselves. We the people no longer have control with our vote because of the "length of term" a Government Official is allowed to serve in office. Because of long terms, they are protected and LOSE PERSPECTIVE OF THE ECONOMIC REALITY OF THE STRUGGLES A FAMILY IS GOING THROUGH JUST TO HAVE QUALITY OF LIFE! NOW THEY HAVE RUN OUT OF "SHORT TERM ECONOMIC FIXES" and can only hope they can come up with another "Grand Economic Plan" to fool "We The People" and drive it through the media. My heart goes out to all the hard working previous generations WHO WERE THE ONES WHO BUILT THIS COUNTRY ON THE PRINCIPLES OF MORAL ETHICS, HARD WORK, AND EQUAL ECONOMIC ACCESS TO ANY AMERICAN CITIZEN WHO HAD THE DESIRE TO EARN AND WORK FOR IT! For the majority of us Americans who still hold these values today, "THE AMERICAN DREAM" has turned into "THE AMERICAN SCREAM"
Unemployment and gas prices are killing the middle-class (and lower) and the economy. 244K more jobs in April, yet unemployment increases (Mc D's 60K part-time jobs that are designed to avoid paying benefits don't count). Crude below $100/brl, yet prices at the pump still climbing. I swear, what's happening almost feels like it's by design. Big oil and most employers are now a bigger threat to the success of our nation's economy than any terrorist ever could be. Those in power, in positions of control and the better off in this country generally don't like rubbing elbows with the middle-class; most never did. So it appears the best way to keep us separated is to make sure the majority of our discretionary, disposable income goes in our gas tanks. That way we can at least go to work (where we are over-worked, under-paid, and we better like it if we want to keep our jobs), and then get back home. No extra $$ for non-business travel, no extra time and $$ for vacations, air-travel has become a luxury for us, no extra $$ to buy anything substantial; no extra $$ for much of anything. Heck, we now run around under the lawn sprinkler while they basque by a pool. All the while companies and the powerful in the US are still making mega $$, still working shorter hours than us, still traveling and vacationing anywhere they want to, still making mega purchases, and pretty much doing everything they want to. What's wrong with this picture? They're laughing all the way to the bank riding on our backs as transportation to the bank. If they want to keep us in our place (as they see it); then keep the current plan and strategy in place. This, of course, is a formula for failure and will eventually be the downfall of the US economy. If we want to see real economic growth in the US, then I suggest doing the following. Substantially lower fuel prices at the pump. We will then have more disposable income to do and buy other things. Goods and services will be less expensive. Demand will increase which means capacity must increase to keep pace; increased capacity means more jobs. The "right" calls what I'm/we're saying "Class Warfare". It is, but it is their war on us; not us on them. We don't begrudge anyone anything. We just don't appreciate being held down at almost every turn. We work very hard for what we have and try to accomplish. Why shouldn't we be able to partake of more of the "American Dream" that we've rightfully earned? And don't insult us by saying we're getting exactly what we've earned; that is a lie. What is happening to middle-class Americans is not right and is immoral. Raise taxes on the = > $250K/yr ($20,833.33/mo). Give us a break; they already have the ability to hide big $$ from being taxed simply because of the $$ they make. This would definitely be fair and moral. Funny thing is, many in this income bracket (and greater) agree they should pay higher taxes. Problem is, they're not in a position to change things because they are outnumbered by the obscenely greedy in our country. Can't we all just get along? Doesn't seem like it.
The USA is in the Crap Can. And going down hill fast... In 3 - 5 we will be a 3rd world country.
All from the fools that run the USA.
The second one was the story headline on MSN. Then it takes you to the 2 million, was 2 million not pc correct for the headline when all CEO's making a dollar can still make millions if done correctly. Idiots people. So many loopholes so many millions to steal and so much corruption. Can anyone not lie or get things right anymore?
The wealthy may run the government but they get the bulk of their $$$ from the lower and middle. With inflation staring us in the face and rising, vacations will be put on hold or scaled back resulting in theme parks like Disney taking a hit. Even fast food joints like Wendy's,McDonalds and other places the lower income folks eat at are raising prices due to cost of meat and fuel for delivery...
In reality,its not a pretty picture as some would paint and its getting worse daily.
The rich might be getting richer, but they are also getting all the poor peons madder. The rich are just digging their own graves. The Revolution is coming soon!
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 added just over a point, holding its weekly gain at 1.0% while the Nasdaq lost 0.4%.
The major averages began the day on an upbeat note, but relinquished their opening gains during the first 90 minutes of action. The early sentiment was boosted by a better-than-expected nonfarm payrolls report for February (175K versus Briefing.com consensus 163K), but a closer look into the report suggested that ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|