Say NO! to QE

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.

Q2E1 - Qualitative Easing

“Qualitative easing.” WTF does that mean. To me it sounds like sizing pants at 6:00pm Thanksgiving Day. OK, so my waist size says 42. But that's not normally what it is. This was an UNUSUALLY large meal. I don't eat like that every day.

Yes, that's true. But you're treating the future as if it's just a flat line from the past. And while it's probably true for Thanksgiving-sized meals, it's not the case for the economy.

Zoom out. Our money is issued by the Federal Reserve Bank. That bank has two missions. One is to encourage employment in the U.S., and the other is to keep inflation low. Great! I can get behind those ideas. But what happens when the two priorities conflict with one another. Well, we know what happens in the business world. One position must be resigned or at least made less important. The Federal Reserve board must then make one a priority and pay less attention to the other. They have been doing that for 6 years now - making employment their main priority will far less concern for inflation.

Quantitative easing began in 2008, was restarted in 2010, and then put into cruise control in 2012. If 1% of Americans know what quantitative easing means, then I will buy you pizza (NO! I did not dump toxic chemicals in your neighborhood!). Think briefly of the Fed as the world's largest bank. It has assets just like any other, and in 6 years, the fed has tripled it's holdings of U.S. Treasury Bonds. Where did the Fed get the money to buy those bonds? Well, they printed it. They created new dollars and then gave the U.S. government those new dollars in exchange for long term bonds.

I don't know the Fed's total holdings. I've never even thought about it. I doubt .1% of Americans have. It's just the national bank. But if you have American dollars in your wallet, checking account, or life savings, you own stock in the Fed. The reputation of the U.S. dollar dictates your purchasing power.

We want to think of our money as a rock. Prudential. Fidelity. Even the insurance industry recognizes the branding there: stable. This is why the Fed has a mandate about inflation. If inflation were at a crazy rate, like 20%, you would see prices jumping every other month. Businesses would be racing ahead of one another to charge each other more, and eventually the entire system of exchanging paper for goods would halt. No one would trust the prices they set today would be worth something tomorrow, and nothing would get done (or eaten, for that matter...). And no one would save ANY money. So 20% is bad. How bad is 10%? Well, probably about half as bad as 20%. idk. At a certain point, you've slowed inflation to a point where people just don't freak out about it. They just understand that as time passes things will cost more. We just shrug our shoulders and say “It is what it is.”

The U.S. having an amount of inflation that gives stability to the economy is no accident. It is carefully controlled by the Federal Reserve. They have come to the agreement that the inflation target year to year is 2.5%. Why that amount? Well, people don't freak out when inflation is at that rate. And yes, they came up with something more verbose which you can read here.
But apparently, a half of a point higher is appropriate now where it was not two years ago. The Wall Street Journal notices the inconsistency of the Fed's action - read about it.

But the fed also has a mandate to advocate for jobs in the United States. There used to not be published targets about this particular aspect of its mandate, but when the stock market went in the shitter in 2008, unemployment jumped drastically. Politicians then demanded action from the Fed. The Fed, knowing the only action that it could take would conflict with its other mandate, set a benchmark on unemployment at 6.5%. Arbitrary? Maybe. Compared to what was considered “full” employment before, 2 more people out of every 100 would not have a job. This likely just means longer unemployment lines, more public assistance, and less mobility for the lower class. But this is a big deal if any of those conditions affects you or those around you. Also, those 2 people out of every 100 still have to eat. They just might be getting their food from their family, friends, or from public assistance.

Should the dollar itself should be staked on employment? The economy moves in cycles, always has, always will. Even the Bible discusses economic cycles. Seven years of plenty, seven years of famine. The Fed has attempted to smooth the rough edges of those cycles. They control inflation by raising interest rates, and they TRY to impact employment by lowering them. Then they lowered them to de facto below zero. Interbank interest right now is lower than inflation. Therefore, loaning money to another bank loses money for the original bank.

The economically transitional period we are currently in has little to do with interest rates. Technology has finally hit professions and “inside” jobs, and productivity has soared with time and cost cutting computer applications. We as a society should be proud – we have created a system where not everybody has to be working for us to make enough food and goods for everyone to live. We still have very high per capita income, and as far as basic needs go, we are a net exporter to the world.

Ok, so what happens when the 6.5% target is reached. If the Fed had signed a contract for this, it would mean they would instantly cease quantitative easing and raise the interbank borrowing rate, which would filter down into every consumer interest rate on the market. It would be an electric shock to the economy – we would be stunned, disoriented, confused, and we would lose track of the next small period of time. Along with the uncertainty a new Fed chair brings, the market is concerned about the timing of the withdrawal of quantitative easing. This week's increase on capital requirements for large banks represents what I believe to be the first step of the Federal Reserve ending quantitative easing. They are requiring higher capital reserves in large banks so that those banks can weather the storm the Fed knows will hit soon. They know the American economy can't take another body blow like 2008 again, but they also know that continuing down the path they are on will lead to massive inflation. Tapering began in late 2013, coinciding with the strength and distraction of the Christmas shopping season. I imagine that Bernanke knew his term was almost up and the first two months would not be a big deal and the big players would wait to make moves until Yellen took office. And he wisely started a major policy shift while he still held office in order to soften the blow that change would eventually bring

It's very funny to change the Q in QE. Quantitative and qualitative mean opposite things and this marks a large shift in the stated purpose of the initiative. Basically they are saying we officially will meet our goal but will continue pumping money into the banking system because we know that if we stop, things will grind to a halt. I'm running on here, more of the “why” next week.