GDP data reveal Fed failure
Stalling economic growth, in the context of a surge of cheap money, demonstrates that structural problems remain.
It wasn't supposed to be this way. When the Federal Reserve committed to pump $85 billion a month in cheap money into a financial system already awash in trillions in extra cash, it was supposed to boost an economy that had started to languish. It was supposed to reinvigorate the job market, boost business investment, and offset strains in the global financial markets. Economic growth had fallen from 4.1% in late 2011 to 2% in the first quarter of 2012 to 1.3% in the second quarter of 2012.
And while financial markets sucked up money like the cheap money addicts they've become, it resulted in only marginal benefits for the average American. Now, just as markets are rattled by the Fed's move towards dialing back its $85 billion a month on concerns over froth and overexcitement in the financial system, the economy has stalled again.
Nine months after launching "QE3" it's clear: The Fed actions have been a failure.
The GDP growth trend shown in the chart below says it all. And it would've been worse if not for a rise in household spending driven not by an increase in income but by a rise in credit and a drop in the savings rate. If income doesn't rise, the surge of spending will prove unsustainable and drag on growth in the months to come.
Now compare the chart to the surge in the monetary base as QE3 spooled up, which is shown below. Still think cheap money will solve all?
How about in the context of all the recent market volatility -- the dramatic falls in corporate bonds, emerging market stocks, precious metals, Treasury bonds, and the first move below the 50-day moving average for the Dow Jones Industrial Average ($INDU) since 2012 -- because the Fed hinted it could slowly roll back its bond purchase rate by a mere $10 or $20 billion?
All of this illustrates a point I've been making for months: The cost of money isn't what's holding back this economy. It's deeper, structural problems in desperate need of reform. Such as an inefficient tax code that discourages small- and mid-size businesses. It's a regulatory burden that's only going to grow with new climate change legislation and the rollout of Obamacare. It is dilapidated infrastructure and overly lax trade policy that doesn't punish China for its intellectual property theft.
The result is a lack of business investment in new machinery and new workers, which in turn is pulling down the economy's ability to grow.
Stocks are rebounding as weaker GDP growth makes it more likely the Fed keeps the stimulus taps wide open. But investors are ignoring the darker, deeper truth: The Fed, after five years of 0% interest rates and a near $2.5 trillion expansion of the monetary base (from just $800 billion before the recession), can no longer juice the economy.
Disclosure: Anthony has recommended AA short to his clients.
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What did we think would happen when big banks are given free money with no strings attached? Did we think they would benevolently trickle it down to main street when the easy money was to be made in commodity speculation? QE1, 2, and 3 was not about stimulating the economy, it was about keeping big banks solvent and financing $4 trillion in new Obama debt at cheap rates.
Coming out of the worst recession since the 1930's, demand for virtually everything is still down, yet we have some of the highest gasoline prices on record, rising prices in food, clothing, metals, etc., all fueled by commodity speculation and a weak dollar brought about by excess cash.
Supply/demand is broken thanks to Mr. Bernanke. $4 gas would be $2.80 were it not for the 30-40% added on by big bank commodity speculators. Same with Corn, coffee, copper, etc. etc.
I am Republican, but am Conservative, leaning toward Tea Party. All these designations and labels confuse the voters to one side or another. We need to finally get the big government back under control. Wheather it was Reagan, Bush, Obama, Carter-it doesnt matter!
There needs to be a movement for bringing down government, those that work for US, to a manageable level. No one Repub or Democrat can OR WILL make the gov smaller. This has got to change people.
The only party, movement is the Tea Party that I can see who demands fiscal reform. If there is another party, maybe left leaning, tell us. Let's get these types of politicans in office.
Autos are up but so are delinquent payments on those autos.Everyone here complains about how the banks aren't lending to prospective home buyers but I'm here to say they're not lending to unqualified borrowers UNLIKE the Autos.
Generaly don't agree with Anthony but I think the point he was trying to make here was, rather than the ill conceived QE Progams perhaps Obama should have been focused on reform that would have given small business and prospective new home owners a better chance or perhaps a blend of the two. Just my nickels worth. Oh I mean .02 forgot there is no inflation.
pumping money into the hands of the super rich will not make main street any better
we have been down this road before in the Great Depression.
We are now in the Greater Depression as the middle class has been turned into the poor class and the rich class has become the super rich class.
Pretty much the US economy is doomed to collapse as they are not supporting the people rather the super rich.
Same mistake they made in the Great Depression
It was only when Hilter threatened to wipe out the Wall Street bankers that they opened their pockets and hired Americans to fight inthe war and build weapons for the war. That small thing lasted about 50 years but now it's over and we are back in a Great Depression.
They know how to make this country great but they choose to put us the middle class into the poor class
It was never a case of "failure to communicate" by the Fed. It was a case of not having the right solution to the financial problem. Wall Street types were like zombies main lining heroine with cheap money. But you can not help those people when they are brain dead to begin with. Now you can hear them out there on the trading floor. "We need drugs! We need cheap money." Give us what we want or we crash the market.
Give me a break!!!!
Better yet, give me a workable solution to this mess.
Hmmmm, Aunt (have a) Merryday has two articles up...
And Mirage has got his panties in a bunch, trying to keep up with him..
C'mon Miragy you have even admitted several times you were holding back just as Mirhaydari has stated....You and many others are "not trying" to turn America around...
You are only worried about your pocket and trying to get Democrats out of office...Remember.?
Also part of the reason you moved away from Chi...
To eliminate a few taxes and hire "cheaper" help down in Texas....
We have been in a couple businesses and we dealt with what we had, and never thought about running from any obligations....Did consider moving further South for our Horse/Cattle/Hog operation, but wasn't really worth the trouble in the long run...You might say we settled.
And going to a Club to have a drink then pick up some fertilizer/lime....Have a nice night.
I think what the author is saying about "structural forces" is what we economists call fiscal policy. There is a structural crisis in which most of the income gains go to the top 1% and corporations; real income per worker continues to drop; roughly 20 million Americans cannot fulltime work. There cannot be effective demand for goods and services in the U.S. if the top 1% get 20% or more of all income and nearly 100% of all capital gains and returns to capital. The working and middle class can no longer go into unsustainable debt, so guess what we are in a long-term recession with no end in sight.
The Obama fiscal stimulus was not large enough to boost the economy when it went into effect in 2009, but it did have a positive effect that complemented the Fed's cheap money policy. Many mainstream economists in early 2009 indicated that the Obama stimulus would not get economic growth up to take off range, and reduce unemployment back to levels below 6 percent.
Then the Republicans won the House of Representatives in 2010 and have throttled back fiscal stimulus every year, including threatening to default on the U.S. Government debt. Their sequestration in 2013 will drop at least 1 percentage point off GDP growth.
I blame the lack of a much larger fiscal stimulus to boost the economy. If the unemployment rate was well below 6% and falling, the Fed would kick up interest rates to more normal rates.
MG says asks Democrats for your share but as per usual says very little about the corrupt Republicans that caused the Great Recession. That's right sheep, your push for little or no Regulations caused this. With sound rules, this never happens. So you reap what YOU Sow and everyone else suffers. Yet of course you Blame anyone and everyone but yourselves. Typical.
Nine months after launching "QE3" it's clear: The Fed actions have been a failure
That's a totally dumb unfounded statement. The author has no clue how bad it might have been if the FED had told business and consumers to screw themselves. No QE's didn't create a economy that's booming but the did stabilize an economy that could've tanked into a depression. But the funny thing is some smart money types think they can start raising interest rates now. We're 3-5 years from interest rates going back to 3-4% so you better invest in something other than fiat dollars. The Great Recession destroyed $20 trillion in credit and the Fed's lousy $3 trillion balance sheet isn't going to fix it.
QE1,2,,3,4 make the unemployment rate go down form 10% to 7.6%.and not to 15% to 25%.
QE works wonderfully, what are you talking about?
QE works so well Japan has to copy and its stocks jump.
The Dow , S&P make all time record highs. Consumer confidence is up.Housing autos are up.
The stock mkt is the best predictor of the economy 6 months out and it is a BIG BULL.
Anthony, you are wrong. Look around you. People are spending.
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