One easy way to measure success is against stated goals. With that in mind, let’s take another quick look Bernanke’s op-ed piece in the Washington Post describing the need for, and the benefits of another round of Quantitative Easing.
Please consider What the Fed did and why: supporting the recovery and sustaining price stability by Ben Bernanke, October 15, 2010.
The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
“Virtuous Circle” Examined
Certainly Cisco’s warning yesterday does nothing to support the contention that lower corporate bond rates will spur investment. Please see Congratulations to Cisco Insiders for Dumping 6,620,750 Shares, 60% of Holdings in 6 Month; Cisco CEO Whines about Taxes; Is Chambers Worth a Dime?)
However, lower corporate rates have created a bubble in junk bonds, hardly a measure of success.
Bernanke wants to drive the long-end of the yield curve lower. This is something we can easily measure since his announcement.
Yield Curve September-November 2010
The above chart hardly represents a stunning measure of success vs. the stated goals.
However, if one wants to measure failure by the number of complaints from our trading partners then QEII was a resounding failure.
The list of complaints about QEII is long and growing: South Korea, Hong Kong, Brazil, China, Volcker Complain about Bernanke’s QE Policy.
To top it off the German Finance minister went so far as to call “clueless”. There is some dispute as to the exact translation of the German quote, but none of the translations are very polite.
The stock market, gold, silver, and commodities have certainly been on a tear, but the bottom line is that gold is reacting to the liquidity, but the consequences to the real economy are negative.
Small Businesses Hurt by QE II
Inquiring minds are digging into the November NFIB Small Business Trends Report for clues about the health of the economy and the plight of small businesses.
Once again the number one problem facing small business owners is lack of sales. The second biggest concern is taxes. In spite of a huge surge in commodity prices, inflation barely registered as a concern.
From the NFIB Report …
Optimism rose again in October to 91.7, but remains stuck in the recession zone established over the past two years, not a good reading even with a 2.7 point improvement over September. This is still a recession level reading based on Index values since 1973. However, job creation plans did turn positive and job reductions ceased. The mood for inventory investment weakened a bit even though views of inventory adequacy improved, and an improvement in sales trends produced a marked improvement in profit trends, still ugly, but less so by a significant amount.
Average employment growth per firm was 0 in October, one of the best performances in years. Reaching the “0” change level raises the odds that Main Street may contribute to private sector job growth for the first time in over a year.
The frequency of reported capital outlays over the past six months rose two points to 47 percent of all firms, three points above the 35 year record low. The percent of owners planning capital outlays in the future fell one point to 18 percent because the environment for capital spending is not good.
The downward pressure on prices appears to be easing as more firms are raising prices and fewer are cutting them. Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years. On the cost side, four percent of owners cited inflation as their number one problem and only three percent cited the cost of labor, so neither labor costs or materials costs are pressuring owners to raise prices.
If “pricing power” in making a comeback, owners will begin to see a reversal of rather adverse profit trends.
PROFITS AND WAGES
Reports of positive earnings trends posted a seven point improvement in October, registering a net negative 26 percent. Still, far more owners report that earnings are deteriorating quarter on quarter than rising.
Overall, 91 percent reported that all their credit needs were met or that they were not interested in borrowing. Nine percent reported credit needs not satisfied, and a record 52 percent said they did not want a loan (13 percent did not answer the question and might be presumed to be uninterested in borrowing as well). Only three percent reported financing as their number one business problem. However, 30 percent of the owners reported weak sales as their top business problem, a major cause of the lack of credit demand observed in financial markets. A near record low 31 percent of all owners reported borrowing on a regular basis. Reported and planned capital spending are at 35 year record low levels, so fewer loans are
Virtually none of that is supportive of the claim QE II was going to prove an economic benefit.
Most Important Problem
Please compare inflation to sales, taxes, competition from big business, and taxes. Inflation barely registers.
Sales and Taxes are Two Biggest Problems
Historically inflation measured as a big concern in the mid-to-late 1970’s. Inflation concerns spiked again in the summer of 2008 along with gas prices. In spite of a huge recent rally in commodities there is no fear of inflation now.
From the report “Seasonally adjusted, the net percent of owners raising prices was a net negative five percent, a six point increase from September. Plans to raise prices rose five points to a net seasonally adjusted 12 percent of owners. However, most plans to raise prices have been frustrated by the recession and weak sales during the past few years.”
The number of business owners raising prices is a net negative 5%. The profit squeeze continues as small businesses are not able to pass along rising input prices. The result is easy to spot: ” far more owners report that earnings are deteriorating quarter on quarter than rising.”
Measures of Success
If success is measured by increased speculation in commodities, junk bonds, and the herding of investors into gold and silver, then the Fed’s policies this year have been a resounding success. Otherwise the Fed’s policies, including QE II have been an abject failure.
Mike “Mish” Shedlock
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