The View From 1776
Friday, February 01, 2013
Barron’s On Fed Monetary Policy
If you are a Barron’s subscriber, read As Stocks Near Records, Why Does the Fed Act as if Times Are Bad?, by Randall W. Forsyth.
Only conspiracy theorists would question why the economy had a head of steam, with a 3.1% annualized real growth rate in the third quarter, ahead of the November elections, only to stall shortly thereafter. To be sure, Superstorm Sandy hurt the quarter’s performance, as did the sharpest cutback in defense spending since the withdrawal from the Vietnam War in the early 1970s. Still, real final sales—GDP less inventory swings—decelerated sharply, to a 1.1% annualized growth rate, from 2.4% in preceding quarter.
Leaving aside the trivial, quarter-to-quarter blips in economic indicators, it’s apparent that the Fed’s money printing has failed to trickle down to the broad economy. The turnover of the money supply—its “velocity”—has fallen, offsetting the increase in the money stock.
As writes Leigh Skene of Lombard Street Research in London:
“In America, for example, the drop in money velocity to almost one-third under the lowest recorded prior to 2012 in this monetary series wiped out 5/8ths of the increase in M2 [the broad money measure, consisting of currency, checking and most savings accounts, including money-market funds] in the past five years.
“Most of the remaining M2 growth created inflation. Worse, excess debt growth increasingly levered asset prices up, creating the biggest asset bubble ever, which widened income disparities. The real incomes of the minority that benefited from microscopic interest rates rose and those of the majority fell. Rising debt burdens and falling real incomes for most people reduced real output growth in the 2000s decade to the second lowest in the 22 decades from 1790, according to Hoisington Investment Management. The 1930s was the lowest decade and the 2010s’ average won’t be higher than third-lowest.”
So, to come back to Paulsen’s point, why does the Fed have its policy throttles on “full speed ahead” if all is well? Or does it only appear so because of the monetary inflation produced by the central bank?