The U.S. central bank, also called Federal Reserve (Fed), announced four quantitative easing (QE) programs, predicting that each one would give a boost to the sluggish U.S. economy.
QE is a government monetary tool employed by a country’s central bank to improve the lending sector’s liquidity by purchasing government, public, or private sector securities. This method was used in the hope that lending institutions would approve more loans.
Reacting to the Fed’s announcement of the various QE initiatives, the S&P 500 index rose after QE1 was announced, from a Nov. 21, 2008, index of 800.03 to 896.24, according to a historical FedPrimeRate.com chart. When QE2 was announced, the index declined between Nov. 5, 2010, and Nov. 26, 2010, from 1,225.85 to 1,189.40 respectively.
With the announcement of the open-ended QE3, the S&P 500 index went from 1,154.23 on Sept. 9, 2011, to 1,216.01, and then to 1,136.43 by Sept. 23, 2011, reaching 1,426.19 by Dec. 31, 2012.
Reasons abound concerning the market reaction to the various QEs. A Nov. 25 article on the Seeking Alpha website suggests, “The most likely explanation is that investors are finally beginning to realize that Fed stimulus is no panacea for America’s economic ills.”
The article states that according to monetary history, “central bank stimulus is subject to diminishing marginal returns.” For a QE program to be successful, each subsequent QE must be larger, which is not the case in the latest U.S. central bank’s QEs.
QE1 was announced on Nov. 25, 2008, and was in effect until March 31, 2010. By the end of QE1, the Fed had purchased $1.25 trillion in mortgage-backed securities, as well as $175 billion of bonds issued by government agencies. Within a timeframe of about a year, mortgage rates dropped from around 6.4 percent to below 5.4 percent.
“The Fed wanted to lower mortgage interest rates and increase the availability of credit for homebuyers to help support the housing market and improve financial market conditions,” according to an entry on the Bankrate.com website.
QE2 was announced on Nov. 3, 2010, and was in effect until June 30, 2011, with the Fed suggesting that it would provide a boost to the economy. Industry experts believed that it would reduce mortgage rates even further.
In reality, QE2 “was not intended to create money, and did not create money. Instead, the program was intended to help the recovery by reducing long-term interest rates. The Fed did that by selling short-term assets and buying long-term bonds—that’s really the essence of LSAP [Large Scale Asset Purchase],” according to a June 5, 2011, article on the Street Light website.
According to the Street Light article, QE2 didn’t cost the taxpayer a penny. The Fed held U.S. government bonds, worth $600 billion, instead of the money. At the same time, long-term interest rates decreased between 0.2 percent and 0.3 percent, having a positive effect on U.S. productivity.
QE3 was initiated on Sept 13, 2012. An open-ended program, QE3 committed to purchase $40 billion of agency mortgage-backed securities monthly and would not be stopped until the dismal labor market statistics showed a marked improvement.
A surprise move by the U.S. central bank was announced in a Dec. 12, 2012, press release, which transferred the QE3 initiative into a QE4 initiative by adding to the QE program.
According to the press release, “the Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month,” keeping it alive until the unemployment rate is at or lower than 6.5 percent, and inflation is no more than 0.5 percent above the long-term goal of 2 percent.
On Jan 4, the Bureau of Labor Statistics (BLS) announced that the unemployment rate by the end of 2012 was 7.8 percent, not mentioning the millions of unemployed who have given up looking for a job and have dropped out of the publicized unemployment rate.
A little mentioned BLS Economic News Release shows a different unemployment statistic in the Alternative Measures of Labor Underutilization table. The highest December 2012 unemployment number is 14.4 percent, which includes discouraged workers—those who are no longer looking for a job.
“The odd thing here is that by tying their policy to the unemployment rate, we could be in for a very long wait for the stimulus to end. The reason is that the unemployment rate has a couple of moving pieces, one being the number of people who are unemployed, and the second consisting of people who have given up looking for work,” a Dec. 14, 2012, article on the PeakProsperity blog suggests.
The latest QE initiative, which also is open-ended, has not opened the markets to the average investor, instead the markets are malfunctioning. According to the PeakProsperity article, stock market pricing is no longer trustworthy.
The reasoning of the article comes from the fact that actions by the U.S. central bank are responsible for mispricing the markets.
“My hypothesis here is that the markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming their orders to take advantage of this flood of money,” the PeakProsperity article states.
The PeakProsperity article quotes in full a Dec. 12, 2012, article by the Wall Street Journal that suggests that a number of central bankers of the largest economies meet bimonthly in Basel, Switzerland, for a dinner discussion. The talk focuses on the global economy and how central banks should take the initiative to meet the problems head-on.
The Wall Street Journal article ends by stating, “If the central bankers are correct, they will help the world economy avoid prolonged stagnation and a repeat of central banking mistakes in the 1930s. If they are wrong, they could kindle inflation or sow the seeds of another financial crisis.”
At the same time, a Jan. 4 article on the Gains, Pains & Capital website, a Phoenix Capital research publication, states that the S&P 500 increased by 14 percent over the same time a year ago, while the Fed’s balance sheet has shown a decrease.
“This is proof positive that stocks have not only disconnected from economic fundamentals … but are now disconnected from the Fed’s actual actions,” the Phoenix Capital article states.
Digging for the Truth
The public thinks that the Fed’s money printing machines are working overtime, totaling $85 billion a month.
According to the Gains, Pains & Capital article, the balance sheet published by the Fed shows that total assets have decreased by $1.3 billion from the same time in 2012.
The latest Fed audited statements available are year-end 2010. With only the most recent unaudited numbers available, it is difficult to verify the exact year-over-year increases or decreases. However, the Gains, Pains & Capital article suggests that the Fed’s balance sheet has decreased year-over-year.
“The implications of this are severe. If the Fed is indeed not employing the policies it announces but is simply engaging in verbal intervention (stating it will do something just so the markets react), then it has lost total credibility as a monetary authority and is nothing more than a market manipulator,” the Phoenix Capital research publication suggests
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