In an interview yesterday with CNBC, the “Maestro of Economic Disaster” said that the programs of Quantitative Easing over the past two years have done little to loosen credit or boost the economy. This isn’t a giant leap of faith here to reach this conclusion considering that the economy grew roughly $1.1 Trillion during a period of time where the Fed spent $1.8 Trillion trying to boost it.
“There is no evidence that the huge inflow of money into the system basically worked. It obviously had some effect on the exchange rate [read: weaker dollar] and the exchange rate was a critical issue in export expansion. Aside from that, I am ill-aware of anything that really worked. Not only QE 2 but QE 1.”
Of course, Greenspan has no room to be criticizing anyone’s policies considering that his own flawed ideologies and theories during his long tenure did nothing but destroy the economic fabric of America. (see chart) However, he is right about the impact on the dollar. QE did boost overall exports from the U.S. as the debasement of the dollar made our goods cheaper to foreigners. Unfortunately, the negative side of that is that a weakening dollar also destroys real incomes of consumers in America as imports become more expensive. This is why as of the recent income reports we are seeing food and energy consuming roughly 23% of wages and salaries.
So, after basically throwing a $2 Trillion kitchen sink at the economy what is the final report card? We already know that QE boosted exports by destroying the purchasing power of the dollar. However, it also did boost asset prices as we showed in our article “How Does QE Boost Asset Prices”, unfortunately that wealth effect only affects about 20 percent of the population, primarily the wealthiest percentiles (ie Wall Street), but left the majority of American consumers poorer in the process. This is why when we look at consumer confidence indexes, employment and spending there has been very little recovery from recessionary levels.
Unfortunately, for those same Americans, the injections of liquidity primarily went directly into Wall Street where it was amply applied in the highest risk, highest return, investments namely commodities. As commodity futures were gobbled up by the trading desks of the major Wall Street firms, hedge funds and speculators the resulting consequence was a spike higher in everything from cotton to corn to oil. As commodity prices spiked so did the decline in the average consumers ability to survive. The connection between commodity prices and QE is undeniable and between the debasement of the dollar and soaring commodity prices eating up more and more of the take home pay of the consumer – it is little wonder that there has not been enough incremental demand on businesses to jolt them into hiring and expanding.
When Bernanke first started the QE programs he stated, according to an Op-Ed piece in the Washington Post, that his goal was that “Easier financial conditions will keep interest rates suppressed in order to help resolve the housing crisis. For this – Bernanke gets an “F”. Housing is worse off than it was prior to the programs and shows little sign of recovery anytime soon.
QE was also supposed to spur spending and consumption which in turn would create more jobs. However, unemployment claims still run well above 400,000 each week, the number of employed persons relative to the population as a whole is at levels we haven’t seen since 1984, so Bernanke’s claim in the Washington Post article that QE would spur the economic cycle gets another “F”.
Inflation and Dollar destruction are hitting the consumer where it hurts the most. Small businesses are reluctant to hire because there is no incremental demand for their products. Coming soon is going to be the realization that government spending will have to be cut which is also going to negatively impact the economy. This leads to lower tax revenue, more uncertainty and slower growth. Yet we continue to do the very things that are impeding economic growth, creating uncertainty and fostering a greater disparity between the top 20% of Americans and the rest of the serfdom.
It’s time for our politicians and leaders to wake up and smell the burning of the dollar.