The Fed's Monetary Stimulus Does Little For Economy, But Creates And Perpetuates Asset Bubbles

Confounded Interest ^ | 10/21/2013 | Anthony B. Sanders

[whitedog57]

The next Federal Reserve Open Market Committee meeting in on October 30th, a preview of Halloween. Despite the lack of evidence of positive growth in the economy, The Fed will likely keep on printing.

fedbalshet102613

Two of The Fed’s tools in its arsenal are the Fed Funds rate and longer-term asset purchases (aka, quantitative easing).

So, what is the record on the employment front with regard to Fed policies? Let’s take a look.

Here is a chart of the unemployment rate (white line) compared to the Fed Funds Target rate (gold) and The Fed’s Balance Sheet (longer-term asset purchases).

u3fedpol2

So far, so good. If we focus on the U3 unemployment rate, it appears that Fed policies are helping reduce the unemployment rate by encouraging firms and consumers to borrower at lower interest rates.

If we switch to U6 which includes the unemployed and partial employment, we see that it is improving, but remains high.

u6fedp3

Switching from unemployment rates, let’s look at the employment to population ratio. The good news? The employment to population ratio has stabilized after the Great Recession. The bad news? It is not rising as had been hoped.

emppopfed1

Labor force participation, as I have discussed before, keeps dropping like a paralyzed falcon. True, some of it is the aging of the American population, but that would have shown up in the employment to population ratio as well.

lfpfedpol5

Real median household income? It peaked in 2000 and then again in 2007, but it has been all downhill from there.

realmedfedpol6

Monetary policy has not been able to fix the flat mortgage purchase applications problem.

mbapurchfedpol7

And mortgage volume continues to fall unabated despite voluminous monetary stimulus.

mtgvolfedpol9

Gold? Until 2012, gold was skyrocketing along with Fed stimulus, until the wheels came off with QE3.

goldfedpol15

But at least house prices at the national level are responding to The Fed’s cheap money strategy.

hpfedpol11

The M1 Money Multiplier? It has been nuked by QE since the excess reserves remain trapped in The Federal Reserve system.

m1fedpol34

M2 Money Velocity continues to go down despite Fed monetary policy. Like Bruce Springsteen.

m2velofedpol

To be sure, many of the problems facing America are structural (such as staggering government deficits and runaway entitlements).

The good: U3 unemployment continues to (slowly) decline. The bad: U6 unemployment is still unacceptably high. The ugly: Declining real median household income, declining labor force participation, flat mortgage purchase applications and mortgage volume.

[whitedog57]

More like Ass Bubbles!

[rstrahan]

So banks are cash-rich, those with banking ties and at the top of Wall Street are rich. The rest of us, not doing so well.

[RayChuang88]

President Obama could have solved this problem back in 2009 if he had implemented income tax reform to encourage savings and capital investment staying in the USA. The flat-rate no-loophole income tax Steve Forbes proposed in 1996--if implemented back then--would have resulted in way over US$10 TRILLION in liquid assets owned by American individuals and businesses now sitting in foreign financial institutions returning to the USA, and that would have been such a huge liquidity boost our economy would be going full-blast by 2010.

[upchuck]

The next Federal Reserve Open Market Committee meeting in on October 30th, a preview of Halloween. Despite the lack of evidence of positive growth in the economy, The Fed will likely keep on printing.

Two of The Fed’s tools in its arsenal are the Fed Funds rate and longer-term asset purchases (aka, quantitative easing).

So, what is the record on the employment front with regard to Fed policies? Let’s take a look.

Here is a chart of the unemployment rate (white line) compared to the Fed Funds Target rate (gold) and The Fed’s Balance Sheet (longer-term asset purchases).

So far, so good. If we focus on the U3 unemployment rate, it appears that Fed policies are helping reduce the unemployment rate by encouraging firms and consumers to borrower at lower interest rates.

If we switch to U6 which includes the unemployed and partial employment, we see that it is improving, but remains high.

Switching from unemployment rates, let’s look at the employment to population ratio. The good news? The employment to population ratio has stabilized after the Great Recession. The bad news? It is not rising as had been hoped.

Labor force participation, as I have discussed before, keeps dropping like a paralyzed falcon. True, some of it is the aging of the American population, but that would have shown up in the employment to population ratio as well.

Real median household income? It peaked in 2000 and then again in 2007, but it has been all downhill from there.

Monetary policy has not been able to fix the flat mortgage purchase applications problem.

And mortgage volume continues to fall unabated despite voluminous monetary stimulus.

Gold? Until 2012, gold was skyrocketing along with Fed stimulus, until the wheels came off with QE3.

But at least house prices at the national level are responding to The Fed’s cheap money strategy.

The M1 Money Multiplier? It has been nuked by QE since the excess reserves remain trapped in The Federal Reserve system.

M2 Money Velocity continues to go down despite Fed monetary policy. Like Bruce Springsteen.

To be sure, many of the problems facing America are structural (such as staggering government deficits and runaway entitlements).

The good: U3 unemployment continues to (slowly) decline.
The bad: U6 unemployment is still unacceptably high.
The ugly: Declining real median household income, declining labor force participation, flat mortgage purchase applications and mortgage volume.