The View From 1776

Measuring Keynes

Robert Stapler assesses the effects of Keynesian economic theories dominating policy making by the Federal Reserve Bank.

How much of the recovery is Quantitative Easing and not, therefore, ‘real growth’?
By Robert Stapler

A few days ago, President Obama was caught reversing himself on the state of the economy within hours of declaring it is “doing fine”.  My curiosity aroused, I sought confirmation of this faux pas (see  and ) to verify I am reacting fairly to his comments. 

Did you notice the not so subtle dig at states and governors who buck his policies?  The obvious implication of that being: any remaining weaknesses, if any, are entirely due to their, and not his, policies (which is clearly debatable).  Since 2011 we have been treated to repeated claims of recovery, only to discover the President has gotten ahead of his facts.  By this, his own admission, the economy is still very much ‘on the ropes’ as even he admits: “There are too many people out of work. The housing market is still weak, too many homes underwater …”  Well, just how bad does it have to be to qualify as ‘still recovering’?  If our being in a recession depended only on how the stock market is doing, then he and his economic advisors would be correct, but as the definition of a recession is broader than that and takes in any number of metrics, some of which are difficult to quantify, they are misleading.  As such, these repeated pronouncements of economic health look more and more like an ‘emperor has no clothes’ scenario, and we are flatly being told to suck it up.  Whereas I am happy for the stock market it is finally confident of making its comeback, what about ours (aka, the rest of us)?  While stock exchanges like DJIA represent a significant chunk of the economy (see ), they are not the whole economy; the rest of which is doing not nearly so well.

Brother Obama is clearly ticked off that some states not only rejected his recovery plan, but made him look stupid in the process.  Whether or not his implication remaining problems are due to ‘maverick economics’ is valid depends a great deal on how you define ‘did a better job of recovering’.  If by this you mean key blue cities (New York, Chicago, D.C., & Detroit) rebounded surprisingly well, then he is probably correct.  But if, by it you mean red states had less to recover from because they did not fall as far, or that they enjoyed substantial growth since or despite the recession, then he is flatly clueless.  Most of the states he implied are frustrating his recovery are, in fact, doing better than the national average on most metrics other than stock markets (which are concentrated in New York and Chicago), and are the source of whatever ‘structural recovery’ we’ve seen.  Lost in Obama’s interpretation is the dependency of markets on capital assets distributed throughout the country upon which the market’s normal recovery relies.

At least some economic commentators on the left have been reporting the economy as underperforming, and have been doing so for quite some time (see ).  Unsurprisingly, each of these engages in blame-shifting not unlike the President’s.  For example, the above NYT commenter/analyst’s choice of metrics and his fixation with government not getting ‘its share’ of the pie suggests the economy is strong precisely where Obama got his way, and weak only where he has been thwarted.  Note, however, his analysis is woefully lacking any number of metrics typical of ‘state of the economy’ and ‘economic issue’ analyses.  To his and Obama’s lists of unresolved weaknesses, therefore, I must add things like: anemic [real] growth (see ), under-employment (shift to part-time skewing U3/U6 numbers), shadow unemployed (half-million worker dropouts, see ), increased dependency (see ), high food prices, high household debt, consumer spending (still weak, only started to edge up in final quarter 2014 and too soon to say this is a trend), banks still reticent about lending to small companies (see ), national debt at all-time high, fewer raises, flat discretionary & holiday spending, low interest rates favoring equity (speculative) buying over securities, factory orders, reductions in employee benefits, high rates of debt write-off & tighter credit (see ), household debt still running high (see ), and the necessity of repeated applications of quantitative easing (a form of stimulus) to name some of the more obvious.  More than one critic has complained of the official stats being “doctored” (see ).  I don’t know this to be a complete list, either, but serves to show just how cherry-picked is the President’s accounting.

One comment made by this last critic got me asking: is there some way of measuring the effect of Bernanke’s quantitative-easing to determine a) did it actually stimulate growth or b) has it merely added fiat-money to a weak market, making it seem more robust than it actually is?  None of my researches thus far have produced such a metric (or method) despite there being plenty of suggestions in the literature all the growth we’ve seen is artificial (see &
).  QE’s defenders argue strenuously against this market artificiality.  It is understandable they would go to some lengths rebutting such an accusation given they promoted such methods in the first place, and recognizing their much ballyhooed prescriptions did nothing more than fuel speculation (which pushed stock prices up) without fueling a structural recovery.  To illustrate, let’s say you have a failing business whose customers are deserting you in droves (going to better run companies); and, rather than sell off assets and cut costs, you borrow money you then use to pad your balance sheet; which restores confidence in you for a time.  Pretty soon, however, your business starts to flag again for the same reasons as before, and you need another infusion of cash (loan) to keep things going.  In doing so, you have traded problems without resolving the underlying issues; and, at some point, restructuring is no long an option.  QE appears to operate similarly.  If true, this suggests ending QE now should result in a market stall, retreat, or even a collapse that has us trapped in a need of more of the same as got us into this predicament.

So, how do we quantify the market increase into productive versus merely inflationary components?  Since quantitative easing does its work through bond and mortgage-backed securities markets (MBS), that is where we should look to see how much those were affected by QE, and how much by other activities.  Similarly, we can look at other market sectors to see what effect (or absence) QE had on those, either as primary or secondary effects. One simple experiment we can do is look at how much the stock market grew versus how much QE cost us in increased debt.  Estimates of national debt increase due to QE vary from $3.5-trillion to 4.5-trillion dollars, and roughly equal the increase in the U.S. Treasury balance sheet.  During this same time-frame (Mar-2009 to Oct-2014), the stock market (DJIA) rose from $6.6-trillion to $18-trillion.  While that suggests QE does not explain all the increase claimed by Forbes, it does suggest we should subtract at least that much to arrive at a truer market valuation ($14-tn rather than $18-tn), at least until such time as the run up is proved stable.  Note also, however impressive even this much seems, it is still well short of the December 2007 peak of $19.9-trillion.  Only by refraining from further interventions (whether another QE, bail outs, or other infusions), can it be seen the result is stable or not.  The pattern so far has been to intervene at every fresh indication the market is slowing, and that just isn’t a reasonable test of QE validity.

Some deniers of this QE imposed ‘false market valuation’ are claiming it had little to no effect on stock market prices, and was never intended as such.  But, if that is true, we have to question why QE was tried at all if not to restore a flagging market.  The original easing might be explained on that basis, but why, then, did the FED resort to QEII and QEIII if not in reaction to falling markets.  The timing alone suggests it was market stalls (and not interest rates or deflation worries) that drove those decisions to up the ante.  After all, the cost of QE falls on all of us in the form of taxes and additional debt, and should, therefore, benefit all in some degree.  If benefitting a tiny few, it cannot be justified as an intervention.  A strict reading of QE’s objectives suggests only the financial sector (banks and mortgage lenders) were to be directly benefitted, and that the means of bailing them out was in the form of government bonds & securities buying which they assumed would lower interest rates while, concurrently, running up bond/security values (which made the banks richer at our expense).  Bernanke also fussed a great deal about recessionary deflation and ‘tipping points’.  Thus, the pro-QE argument is fully in-line with Bernanke’s stated argument and objectives as distracts us from its lack of broader utility and rank cronyism.  Does it matter a program of ditch digging & refilling succeeds in its objective of employing unemployables if it has no other impact than burdening the rest of with the costs of their employments?

Here is a source (see ) reminding us at least part of the justification for QE was it would ‘prop up stock market prices’ and help ‘revive the economy’.  That, at least was the justification most financially savvy critics and advocates assumed was among its goals.  I am pretty sure most taxpayers had some expectation it would brighten our lives also.  Note the date the article was written.  I was looking specifically for subtle changes in the way QE is portrayed (then versus now) to us, and so looked for older titles.  I was trying for articles still older (2009-2010), but the internet can be difficult finding those (informational evaporation).  Moreover, I suspect sources like Wikipedia of periodically scrubbing their content to favor a particular party and views.  Government is also notorious for ‘refreshing’ its own narratives as politically necessary, and drops hints to others to what needs hiding.  Sure enough, almost nothing is now being said about this paradigm shift in QE’s justification.  Rather, supporters (and critics, alike) are focused on only those objectives that were met and match the current narrative, forgetting whether or not the objectives met are consistent or worth the cost (i.e., whether it benefitted the nation as a whole, made for a sustainably robust economy, or just bailed out Bernanke’s banking buddies and a handful of Wall Street insiders).  On the other hand, I did find one confirmation not all of QE’s objectives were [then] as currently portrayed (see ).  Like me, he challenges QE’s [then] stated objectives as criteria for success, and condemns the same apparent goal-post shifting cover up.  In his case, the dropped metric tied to QE is unemployment rather than market strength, but the ‘moving goal post’ recognition is the same.

While failing to prove or disprove the contention QE (and only QE) drove the recovery and steady market improvement under Obama, evidence supporting independent market sustainability is every bit as lacking.  As there is no question QE increased national debt several trillion dollars over what it might have been, justification for it needs to be something greater than it bailed out some favored few.

Additional links:
Those making the case against QE: - describes QE as an addiction we will/must resume the moment the market stumbles – the Money GPS - libertarian Anthony Randazzo argues QE is a ‘steal from the poor to give to the rich’ scheme, while I agree it increases ‘income inequality’ I have to then ask the obvious question, ‘so what?’  We already know that income inequality does not necessarily make the poor ‘poorer’ in real terms, and, in a truly ‘free market’, it makes them better off (call it ‘trickle-down wealth’, ‘all boats float in a rising tide’, whatever).  The real test here, then, would be: are the poor better off in real term as a consequence of the additional $3.5-trillion QE brought into the economy, or, as is more likely, they have been hurt by inflation or (assuming no inflation) they have been relatively unaffected by QE (so far).  Since we know QE pumped a massive amount of new money into the system while causing little to no inflation, I have to ask: where did it all go, and when will it rear its ugly inflationary head?

Those defending QE: – C.NBC claims QE did not cause market to climb - asserts QE will continue propping the market up for some time - socialist view of QE; yet even they agree QE created fiat money that directly “funneled an estimated $7 to $10 trillion into financial markets”—here-s-what-it-accomplished-182947394.html - Rick Newman claims QE stoked the stock-market, boosted car and home sales, - academic economist opines QE helped the economy.  Long on technical explanations, but fails to mention any specifics regarding what QE supposedly did as ‘helped’ real people.

Related stuff: - QE a vicious trap
- just how big is the economy really (analysis incomplete, but probably as good as it gets)? - shows we are still not recovered to pre-2008 market level (another 1.1 trillion to go) - set graph to 3 month and 3 year scales; market appears to have both flattened and become noticeably more erratic since QE ended on 9/17/2014. - NewsMaxTV – Chris Martenson – “If the money multiplier and velocity were constants, then the monetary base would be high-powered indeed. Any increase in the base (which the Fed can manipulate at will) would cause a proportional increase in nominal GDP. The only thing left to determine would be how much of the change in nominal GDP would express itself as an increase in real output and how much as inflation” and “… that things would have been even worse without [QE] … is a counterfactual hypothesis that can never be conclusively tested …” – Ed Dolan, 11/4/2014 ; ; for term explanations).