Janet Yellen took office right after a
time where her new job is tremendously public. The chair position has
always been public to a degree, but Congress and the Executive Branch
have demanded more transparency and explanations for those wizardly
ways. Yellen has not shied away from aggressively embracing this
transparency and has made the news quite a bit in three months. I
remember when she was testifying before Congress and she let slip an
answer that convicted Congress for many of the problems we currently
face. She pointed out that Congress has shirked its part of the
bargain for helping bring employment to the American people and, in doing so,
unintentionally spooked the short term markets with her admission
that interest rates and cheap money are only one piece of the total
treatment package necessary to fix America's ailing economy. It IS
probably upsetting to have a mandate to deal with unemployment when
you can't actually hire people. She hoped her statement would lead to
an epiphany by Congress that it should begin a works program so the
money the Fed is providing so cheaply gets to the people who need
work and would also become consumers in the economy. We're still waiting.
Here's irony for you: QE 1 was $100billion/month. QE 2 was $75 billion/month; QE 3 began at $40billion/month and when combined with Operation Twist was $85billion/month. Averaging them all together, the Fed has pumped an
average of $83.75 billion per month into the economy. For the same
cost, they could have employed 19.7 million people at $4250/month,
the American median income. There are about 116 million full time
workers in America, and it wouldn't take 19 million more for the
economy to hit a huge boom cycle. Hire three million people at
$3000/month to build things. The payroll is $108 billion a year.
Unskilled or “wrong-skilled” workers get new training in
construction and also spend money in their localities which further
stimulates the economy.
Businesses need customers. Customers
need money. Money comes from jobs. Yellen was making the obvious
point that with the amount the Fed has “invested” in the American
economy, Congress could have done much more easily with a works
program. Three million new workers would be a huge new government
program. But it's cheaper than what we're doing; it's transparent
stimulus, and it puts money in the hands of average American people rather than
private corporations and banks. Even if we also spent $400 billion a year
on real estate and materials, we would be spending half of what we're
spending now.
The catch is that Fed stimulus doesn't
look like spending. I could become a conspiracy theorist and make up
stories that this stimulus was the deal with the demon (Dimon?) back
in 2008 when Chase stepped in with a whole lot of cash to prop up the
GM and therefore the financial system. But I digress. At any rate, the Fed has already
done what it's done – the money is printed. We can only hope that
it makes its way back into the American economy.We can't unprint that money, so we have to figure out where to go from there.
A brief analogy with concrete, which is
a large part of my day job. You make a concrete mix, and it will have
a certain strength. Rock, sand, cement, and water mixed in the right
proportions become strong enough to support 100,000lb vehicles. Once
it's in the mixer though, there's only one thing you can do – add
water. You add the water to buy yourself time to get the concrete
placed, to keep the mix from setting up before you need it to. But
you can't subtract water, and the water weakens the concrete's
strength. You buy yourself a little bit of time but you lose
strength. Lose enough strength and that concrete will no longer
support the loads you need it to, and it will structurally fail. If
an engineer comes and tests the concrete's strength and it isn't the
strength specified, it will have to be ripped out and begun again.
The Fed has been adding water now for
five years. They bought us time to get people employed; time for
businesses to regain customers. As that money makes its way into the
economy (and QE truly is “trickle down,” supply-side economics),
the money will lose value. Eventually, that new money will be spread
around to millions of people, and it will become less valuable.
A catch 22. You are supposed to help
employment, so you first lower rates to zero. That doesn't work fast
enough, so you start to actually print money to put into the economy.
This, with the expected eventual inflation, pushes effective interest
rates below 0. Still, jobs are created but at a slow pace.
Let's face it:QEwhatevernumberyouwanttoadd is becoming liquidation
for American businesses and real estate on foreign markets. We are
just BEGGING foreign countries to come in and buy our stuff. But what
happens when they actually own it all?! We are going to become
indentured servants to foreign investors. What's more, since many of
those investors represent sovereign wealth funds, we could end up
with a significant number of Americans actually working for foreign
countries' governments.
It is imperative that our government
and the Federal Reserve Board get a hold of this situation and fast.
The government has many weaknesses, but one thing it does have is
transparency and public information requirements. Trillions of dollars
out on the private market right now do not, and we have no
way to know where all of that money is going.
One more even dirtier analogy. QE is an
upper for the economy – think crack cocaine. It creates an instant
high that immediately begins to taper down. The only thing that gets
that high again is more crack. And, far more dangerous than some
other drugs, crack is both physically and mentally addictive. Not
only does the mind desire the feeling of the high, the body becomes
dependent on the chemical. The American economy used to be addicted
to the drug of consumer spending. To replace it, we started taking
QE. Somehow, some way, we have to get into rehab before the normal
course of action for drug addicts takes place for the entire American
economy.