Critics of this latest round of Quantitative Easing (QE3) accuse the Fed of bowing to political pressure from the White House in advance of the upcoming election in pursuit of policies that debase the dollar and have not helped reduce unemployment or restimulate business investment. Contrasting current policies with the polar opposite policies successfully implemented by Paul Volcker in 1979, Obama critic Larry Kudlow wrote, “It’s like history is repeating itself, but in reverse.”
I do believe that the QE3 announcement is confirmation to what the May-Investments Leading Indicators Index is showing; economic fundamentals are deteriorating rapidly and the Fed is worried. While the critics charge that QE3 will be no more successful than the first two attempts, I believe the evidence on Quantitative Easing is unclear. While it is clear that interest rates can’t go any lower, so the normal Fed tools aren’t working, it’s hard to know where we would be absent this digital printing press, which is working overtime. It is entirely possible that absent “Helicopter Ben’s” herculean efforts to spread money we don’t have to random companies throughout the financial sector, we might already be in a Depression.
One reason that Bernanke is doing just the opposite of Volcker is that the 1979 Fed was fighting rising and persistent inflation. Today’s Fed is petrified of deflation, inflation’s polar opposite. No wonder it is using a different set of tools. Rather than blaming the White House, it is fair to say that there is real uncertainty, and honest differences of opinion, about the efficacy of current Fed policies.
The real problem is that something other than low interest rates is holding back confidence and business investment. Indeed, the current policy of keeping interest rates unrealistically low, which boosts bank profitability at the expense of retirees, just forces the elderly, foundations, and other savers to take more risk than they’d like with their nest eggs. This policy of “financial repression” punishes retirees who had hoped to live off of their savings when they are too old to work. It is a cold-hearted subsidy of U.S. government borrowing that is forcing people to put off retirement, take more risk than is appropriate, cut back on day-to-day spending, and forces more dependence on Social Insurance programs. Is it any wonder that confidence is waning?
Most readers don’t spend a lot of time thinking about U.S. government fiscal and monetary policy. These subjects seem like dry, “intellectual” pursuits with little bearing on daily concerns. For May-Investments, however, these political economic policies, known in economics jargon as “macroeconomics,” have clear consequences and we see the impact on our friends and neighbors on a regular basis.
Households forced to choose between lowering their standard of living because their bank savings no longer pay a decent return, or taking on additional risk, are moving out the risk spectrum into securities that have hard to interpret risk associated with them. When these investments decline in value, as they almost certainly will, scared investors will lock in losses as the frightened herd heads for the door. While millions blame “the banks” for today’s ills, in reality it is government policies, bureaucrats at the Treasury, and economists at the Federal Reserve who are largely responsible. True, bankers are the beneficiaries – but it is current macroeconomic policy which is largely to blame. When we look at this economy and try to assess what “excesses” might lead to a new recession, the clear and obvious candidate is the bond market, which has been pumped up by Federal Reserve policies that have inflated the value of income paying securities.
Markets are a mess, and it is the hyper-regulated banking sector that is mostly to blame.
The politicians in Washington D.C. are focused on arguing about social issues and tiny steps that don’t begin to solve the country’s economic problems. “Nero fiddles while Rome burns.” The Fed’s policies of financial repression are doing more harm than good. QE3 is, at best, a narcotic designed to get us through the next few months. No matter what your party affiliation, May-Investments urges readers to make your vote count, pay special attention to voting for candidates whose top priority is getting the economy working again, and remember that “all ties go to the challenger.” Both parties are guilty. Incumbents really aren’t going to turn the ship around. If we want a better future, we have to do things differently. If we want this brain damage to stop, we need to stop letting the folks in power beat our heads against the wall. If we don’t want the punishment that the Fed has laid out for us, then rather than continue to mask the symptoms, we need to take whatever macroeconomic medicine will lead to a cure.
Vote early. Vote often. Make it count.
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .
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