Fed Quantitative Easing No Help for Economy

The market’s been abuzz in recent weeks with rumors of another program by the Federal Reserve designed to pump cash into the economy through the purchase of U.S. Treasuries – perhaps a half trillion dollars worth.  There’s good reason for the markets to be excited, but hopes for a boost to the economy are way over-blown. 

Let’s think it through.  In order to help the economy, the money has to get from the Federal Reserve into the economy.  By purchasing treasuries, the money has only moved down the street from the Fed to the Treasury Department.  The only way to move the money from the Treasury Department into the economy is if the government spends it – that is, through more deficit spending than what is currently taking place.  That’s just not going to happen, especially after the electorate today sends a clear message that spending has to be reined in. 

So what will happen with all that newly printed Fed money?  If the Fed really wanted to boost the economy by issuing money, it should simply bypass all the middle men and send a check for $2,000 to every man, woman and child.  (That’d come to about $600 billion.)  That’s not likely to happen either. 

Assuming that everyone is correct and the Fed will buy treasuries, treasuries that were already slated to be issued and sold, it will simply drive up the demand for treasuries, artificially driving prices higher and yields lower.  I suppose one could argue that holding treasury yields lower will tend to keep interest rates down, thus boosting the economy, but that’s a weak case.  Interest rates have already been driven about as low as they can go, and the economy is still a basket case.

But here’s what will happen.  The infusion of the Fed money into the treasury market will crowd out other purchasers – primarily foreign buyers like the Chinese, Japanese and Germans.  But their trade dollars ultimately have to come back to the U.S. through the purchase of something.  The only possibilities are:

  1. Direct investment – buying or building factories, real estate, etc.
  2. Purchase of public and private bonds.
  3. Purchase of equities.

The first option is highly unlikely.  Net direct investment in the U.S. is outward – that is, money is flowing out of the U.S. faster than it’s coming in.  And why would China invest in factories in the U.S. and undermine its own exports?  The second option isn’t viable, because that’s the one they’re being crowded out of by the Federal Reserve, although they could also invest in state and municipal bonds, as well as coporate bonds.  But, times being what they are, there’s not going to be a big wave of state and municipal bonds being issued.  And when it comes to corporate bonds, the money raised through their issuance is largely used to invest in foreign opportunities.  So investing in corporate bonds doesn’t solve the problem of returning the dollars to the U.S.

That leaves equities – the stock market.  Ultimately, the Fed’s printed money is going to drive a demand for stocks.  Rising stock prices will certainly make investors feel richer, perhaps making them more likely to spend, providing some tiny boost to the economy.  (So enjoy the market rally while it lasts.)  But much of that spending will be on imports, since little is manufactured in this country, so the Fed money is more likely to boost the economies of China, Japan and Germany than the U.S. 

The newly minted Fed money will also tend to drive down the value of the dollar, putting a squeeze on foreign manufacturers, but not enough to bring any jobs back to the U.S.  When the Fed money has finished rippling the pond of the global economy, nothing will have changed.  No jobs will have been created, none will have returned from foreign manufacturing and U.S. unemployment will be unaffected.  Then what?  The stimulus program didn’t work.  Fed quantitative easing to this point (totaling almost $2 trillion) hasn’t worked.  This new round of easing won’t work either.  So then what do we do?

In all likelihood, nothing.  The economy we have is the new normal.  Actually, it’s worse than that.  The decline in the economy, not its current state, is the new normal.  That decline will continue as a growing U.S. population and world population expand the labor pool and our productive capacity while simultaneously crowding out and driving down our ability to consume that capacity.  World War III, the global war for employment, will escalate.

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4 Responses to Fed Quantitative Easing No Help for Economy

  1. MikeF says:

    Perhaps this is an oversimplification, but I am after all, the King of Simple. In your example of sending $2,000 to every man woman and child (which I agree won’t happen),what happens once the money is spent? The same thing that happened once the stimulus was spent…we go back to square one with greater public and private debt and zero-increased long term employment.

    In the end, in order to enjoy a true recovery, real jobs would need to materialize to fill real needs. Since all of our REAL needs are already over-fulfilled; jobs, rather then materializing, are falsely created using false money from the Fed.

    We simply have more people than we have viable jobs and in our current globalized setting; we always will have. Labor (brawn or brains), is subject to the Law of Supply and Demand. The only way to cheat the Law is to create false employment with false money and that too will soon reach a mathematical impasse.

    • Pete Murphy says:

      Agree 100%.

      It will be interesting to see how the new Republican-led Congress (the House) responds to its mandate to cut the deficit. I hope they do but have my doubts. I just saw George Stephanopolous interview Rand Paul. When pressed on exactly how he’d tackle the deficit, Paul seemed to dodge the question and fall back on old sayings about eliminating waste and fraud. Same ol’ same ol’.

      I also saw a report last night about how foreign interests are beginning to snap up commercial real estate, so option 1 (real estate) that I presented in this post might suck in some trade dollars. Another real estate bubble in the making? Oh boy, just what we need.

  2. MikeF says:

    Pete,

    As you suggested, most options are well out of sight of even our rear view mirror. Any critical problem that goes unattended for a lengthy period has the propensity to become unsolvable in a palatable manner…and in some instances, in any manner.

    A great fallacy of the human mind is not recognizing that there are in fact problems that can’t be solved.

    Personally, I don’t think it’s possible to create another real estate bubble. Commercial real estate values depend on brisk PROFITABLE commerce and increasing demand.

    I have stated for many years that foreign dollars would simply buy a financially weakened America. The former is made possible by our lax foreign ownership laws. As the dollar weakens, the price of America gets cheaper every day.

  3. Pete Murphy says:

    Well, $600 billion it is. The Fed announced it earlier this afternoon.

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