QE2 finally pulls into port

posted at 10:45 am on June 30, 2011 by Ed Morrissey

Almost eight months ago, the Federal Reserve announced their intention to launch a second round of “quantitative easing,” otherwise known as printing money.  In the absence of policies that promote economic growth, the Fed used the one tool they had to encourage investment and enhance exports, which was to devalue the dollar in a way that discouraged cash hoarding.  That project comes to an end today, and the Washington Post notes that the results are less than appealing:

The effort, which became known in financial circles as the second round ofquantitative easing, or QE2, was the Fed’s effort to avert a slip into another recession and toward deflation, or falling prices. As it ends, it shows more than anything the limits of the power of monetary policy to correct what ails the U.S. economy.

Economic growth is set to be somewhere around a 2 percent pace in the first half of 2011, when the QE2 bond purchases took place. That is slower than the economy’s long-term growth path and nowhere near enough to dig out of the nation’s deep economic hole.

It’s not that QE2 had no impact. Inflation was well below the Fed’s unofficial target of around 2 percent last summer, and the chance that deflation, or falling prices, might take hold seemed real. That risk is now minuscule, and inflation is roughly in line with the Fed’s target. …

“If you come at it from the point of view that you think deflation risk was significant last summer and you want to avoid that, QE2 was a success,” said Michael Gapen, senior U.S. economist at Barclays Capital. “If you look at it from the point of view that you wanted to make the recovery stronger and more durable, you would have a lingering bad taste in your mouth.”

How successful has QE2 been?  Let’s look at the meta numbers for the economy.  In 2010Q3, the annualized GDP growth rate was 2.6%, and in Q4 just before the purchases began, it was 3.1%.  The QE2 purchases began in January, and the final 2011Q1 number is 1.9% and Q2 is looking at falling below that.

Employment numbers don’t look very good, either, although it’s not as bad at the GDP series.  In November 2010, the unemployment rate was 9.8%, which equaled a high for the year.  That fell a full percentage point by March, but has since risen again to 9.1%.  We have added about 160,000 jobs a month since November, which barely exceeds what is needed to keep up with population growth.  Meanwhile, the latest indicators suggest that we’re going to start shedding jobs and may be tipping perilously close to recession.

Some will argue that the problems in 2011 are more external, with gas prices soaring.  But that’s part of QE2.  One of the motives of the Fed was to encourage exports at the expense of imports by weakening the dollar.  The US imports most of its oil, which means that a weaker dollar makes fuel more expensive, leading to inflation in retail markets as well.  A few people predicted this very outcome when the Fed announced its QE2 project — one of whom was Sarah Palin, who got roundly ridiculed for her prediction, which turned out to be all too accurate.

The Post notes that the stock market did well during QE2, which is true enough.  It’s also true that the rise isn’t as impressive because of the weakened dollar.  Artificially inflating the dollar means that price rises don’t indicate a real increase in value, since the dollar doesn’t have the same buying power.  On January 1, when the Fed began its QE2 spree, the Dow Jones was at 11670.75; it’s now at 12261.42 as of yesterday’s close.  That’s an increase of 5% in six months, which is decent but not terribly impressive, considering the inflation conducted by the Fed to boost it. Now that QE2 has come to an end, we’ll see how much of that momentum continues; I’m betting on not much.

It’s not the Fed’s fault that this didn’t work, and it’s still worth noting that the Fed mainly wanted to avoid deflation, which it did succeed in preventing.  The Fed has no other tools left in its bag to boost the economy.  The money policy is as loose as it could possibly be at the moment.  The problem with the economy is not the money supply, but the economic and regulatory policies of the Obama administration.  Until those change, we won’t pull out of the stagnation cycle we’ve seen for the past two years.

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More money to bolster the reelection campaign…

Khun Joe on June 30, 2011 at 10:47 AM

So. We’re no better off than before we started monetizing our debt, and we’re getting closer to the point where it’s more economical to burn our money for fuel.

Thanks, Ben!

KingGold on June 30, 2011 at 10:48 AM

It’s a good thing I already own a wheelbarrow (just need to wash the dirt out of it, so it won’t get the bills dirty).

Ward Cleaver on June 30, 2011 at 10:49 AM

Here’s an idea from an armchair economist: CREATE PRIVATE SECTOR JOBS! Spur innovation. Basically, get back to the American ideal and pull off this damn Socialist highway.

*crickets*

search4truth on June 30, 2011 at 10:50 AM

This will upset Owebama.

artist on June 30, 2011 at 10:50 AM

Hello??? Did I NOT show the way in the early 1920′s???

Warren G. Harding on June 30, 2011 at 10:51 AM

WashJeff on June 30, 2011 at 10:54 AM

Smart Power Economics.

pain train on June 30, 2011 at 10:54 AM

Ship of fools

On a cruel sea…

golfmann on June 30, 2011 at 10:55 AM

Clever headline. But the news sucks.

UltimateBob on June 30, 2011 at 10:56 AM

The problem is that the Fed has long accepted if not welcomed implicit responsibility for maintaining “full” employment and averting recessions so it can’t really shrug off the numbers now.

Seth Halpern on June 30, 2011 at 10:58 AM

So if you compute our growth in some other currency, did we even grow at all? That is, wasn’t the dollar weakening at the same time these measly growth numbers took place? I’m wondering if we’re even treading water compared to some outside frame of reference.

TexasDan on June 30, 2011 at 10:58 AM

QE3 will be bigger and better.

DFCtomm on June 30, 2011 at 11:00 AM

No surprise – didn’t we expect just such a result?
Well, some of us, anyway.

Sarah Palin, who got roundly ridiculed for her prediction, which turned out to be all too accurate.

Getting to be a regular occurrence. Now, who’s not smart enough to be President? (present idiot in chief excepted, ’cause he’s already proven his inability.)

IrishEyes on June 30, 2011 at 11:05 AM

It’s not the Fed’s fault that this didn’t work, and it’s still worth noting that the Fed mainly wanted to avoid deflation, which it did succeed in preventing. The Fed has no other tools left in its bag to boost the economy. The money policy is as loose as it could possibly be at the moment. The problem with the economy is not the money supply, but the economic and regulatory policies of the Obama administration. Until those change, we won’t pull out of the stagnation cycle we’ve seen for the past two years.

If the Fed expected it to work, then it is their fault. Monetary policy can only do so much, and there is no excuse for expecting better.

That said, the real problem is simple. Socialism doesn’t work.

tom on June 30, 2011 at 11:07 AM

Well obviously WE NEED MORE REGULATION!

GarandFan on June 30, 2011 at 11:07 AM

It’s not the Fed’s fault that this didn’t work, and it’s still worth noting that the Fed mainly wanted to avoid deflation, which it did succeed in preventing.

I don’t think this is true. I saw a article yesterday that many stores will begin DEEP discounting items as much as 50% in the coming weeks, in order to move merchandise off before the school sales in about 4 weeks.(inventories are too high beginning in this last qtr)

We are only buying necessities, and only after we fail to repair an item…we are making do with what we have.

orbitalair on June 30, 2011 at 11:08 AM

On the one hand, the stock market looked good for a long time. On the other hand, it wasn’t real value but inflation that made it look good. Money on paper is just paper, after all.

mchristian on June 30, 2011 at 11:11 AM

Ship of fools

By World party

Excellent tune for this crapola, can’t get to the linky now

cmsinaz on June 30, 2011 at 11:12 AM

mchristian on June 30, 2011 at 11:11 AM

There was (and still is) the fact that companies are reluctant to invest in their own futures due to the uncertainty created by this administration. So they moved much of their money into securities and commodities waiting for more certain times.

NotCoach on June 30, 2011 at 11:14 AM

Not Really. As the Treasury mature and the principal is paid off, the Fed will then take this principal purchase more Treasuries. In a couple of words it’s “open ended”.

Oil Can on June 30, 2011 at 11:22 AM

If you really want to know “what ails the U.S. economy”, look in the Oval Office.

Nothing will help the economy more than getting rid of the Jackass.

slickwillie2001 on June 30, 2011 at 11:22 AM

The great lesson of economic history is that central planning and price fixing doesn’t work – so why do we have a Federal Reserve to centrally plan the economy and fix interest rates?

We need a free market in money. Let’s legalize competition in currency by repealing legal tender laws, and let’s audit the Fed!

Inkblots on June 30, 2011 at 11:22 AM

Finally pulled into port. Sadly, the clowns crewing the ship managed to run it full steam into the port facilities, smashing buildings and slaughtering stevedores.

Bishop on June 30, 2011 at 11:23 AM

We are only buying necessities, and only after we fail to repair an item…we are making do with what we have.

orbitalair on June 30, 2011 at 11:08 AM

True. My oven crapped out but the stove still works so I am not buying a new one til fall or winter. Using the grill for the summer. Keeping my money, what there is of it.

NJ Red on June 30, 2011 at 11:24 AM

Expect the following from the end of QE2:

– Significant increase in interest rate on Treasuries since the Fed won’t be buying them anymore and new buyers aren’t going to settle for low rates

– Which will crater the value of all existing Treasuries

– Which will cause a sell off in the stock market, hence a decline in the indexes, as owners liquidate their holdings to buy the new, higher interest Treasuries

– A temporary blip upward in the dollar vs. euro and other currencies, with a corresponding temporary drop in the value of commodities and metals

– At some point the purchase of new Treasuries will be oversold and the dollar will begin a steep decline

– QE3, called by a new focus group tested name, will resume big time

– Which will cause hyper-inflation that will make QE2 look like a day at the beach… and chaos in the streets.

Have a nice day.

TXUS on June 30, 2011 at 11:24 AM

QE2 finally pulls into port

TITANIC 2: This time, lets aim directly AT the iceberg!!!

What could go wrong???

Also, we’ll travel lighter this time, because we’re not taking any life boats.

landlines on June 30, 2011 at 11:25 AM

devalue the dollar in a way that discouraged cash hoarding

AKA savings, the prerequisite process of capital formation necessary before sustainable investment can produce real economic grow, not speculative bubbles driven by currency manipulation and deliberate inflationism by the Fed.

Still, that’s some quality spin there, Ed. Way to toe the party li(n)e.

Inkblots on June 30, 2011 at 11:29 AM

“On the edge of oblivion all the world is Babylon. And all the love and everyone, a ship of fools, sailing on…”

Mojave Mark on June 30, 2011 at 11:29 AM

QE to infinity!!!!!

PatriotRider on June 30, 2011 at 11:31 AM

US Fed extends crisis aid for ECB, BoE

http://old.news.yahoo.com/s/afp/20110629/wl_canada_afp/usbankecbboefinanceswitzerlandcanada

To repeal the authority to provide certain loans to the International Monetary Fund, the increase in the United States quota to the Fund, and certain other related authorities, and to rescind related appropriated amounts.
Vote Counts: YEAs 44
NAYs 55
Not Voting 1

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=112&session=1&vote=00099

marinetbryant on June 30, 2011 at 11:32 AM

“On the edge of oblivion all the world is Babylon. And all the love and everyone, a ship of fools, sailing on…”
Mojave Mark on June 30, 2011 at 11:29 AM

That’s from a Nugent tune, isn’t it?

Bishop on June 30, 2011 at 11:35 AM

ship of fools

cmsinaz on June 30, 2011 at 11:47 AM

Obama’s Clever Way to Punt the Tough Calls: Driving the Dollar Down
by Sarah Palin on Wednesday, November 10, 2010 at 10:15am

In his press conference on Monday, President Obama responded to critics of the Federal Reserve’s decision to start a new round of quantitative easing – a fancy term for printing money out of thin air. He claimed this move would drive up U.S. growth rates. He also warned that “the worst thing that could happen to the world economy, not just ours but the entire world’s economy is if we end up being stuck with no growth or very limited growth.”

The latter is certainly true. It would be a global disaster if the U.S. economy remained permanently stuck in the mud. But the same cannot be said of his claim that the Fed’s experiment in pump priming would automatically lead to increased economic growth. By the time this experiment is over, QE will make us queasy.

Will driving the dollar down in this way do anything to boost U.S. exports? The short answer is not really. A weaker dollar will temporarily boost exports by making our goods cheaper to sell; but inevitably other countries will respond in kind, triggering the kind of currency wars economists are warning us about. It’s precisely to prevent this scenario that World Bank President Robert Zoellick recently came out in favor of some new type of gold standard or “international reference point.”

Will QE2 then at least boost domestic investment? No, again. As I explained in my speech in Phoenix, the reason banks aren’t lending and businesses aren’t investing isn’t because of insufficient access to credit. There’s plenty of money around, it’s just that no one’s willing to spend it. Big businesses especially have been hoarding cash. They’re not expanding or adding to their workforce because there’s just too much uncertainty created by a lot of big government experiments that aren’t working. It’s the President’s own policies that are creating this uncertainty.

The President is an educated man. I would hope that he knows these things as well as you and I do. So why then, if he knows it won’t really boost our exports or our domestic investments, would he still come out in defense of this dangerous experiment? I think the most plausible answer has to do with the debt. As liberal economist Paul Krugman has explained, a little inflation goes a long way towards driving down the value of the enormous national debt Obama has run up. And the higher the inflation, the greater the likelihood he won’t have to take any of the tough decisions needed to bring the deficit back down. In other words, pushing inflation upwards means you can have your cake and eat it too. You can spend all you like and then make the bill disappear by driving down the value of the dollar – buying with one hand the debt your reckless spending is issuing with the other. No need to cut spending, folks, just run the printing presses. It’s a win-win scenario.

Or maybe not. Because I fear there will be plenty of losers if this really happens, not least the millions of Americans who’ll see the value of their incomes and savings eroded. As the chair of the President’s own Debt Reduction Task Force, former CBO director Alice Rivlin explained, this sort of policy is no good. Sooner or later – probably sooner rather than later – it will come back to bite us in the behind. Rivlin warned: “As our debt mounts, the risk grows that our creditors, especially foreign creditors who own half our debt, will lose confidence in our ability to get our house in order and will demand dramatically higher interest rates.” Obviously, that’s even more likely to happen when they figure out that the Fed is deliberately driving down the value of the dollars they already hold. When they do lose confidence, Rivlin explained, that will spell disaster for our economy, “derailing the economic recovery and ballooning the cost of servicing the federal debt.”

If the President was serious about getting the economy moving again, he’d stop supporting the Fed’s dangerous experiments with our currency and focus instead on what actually works: reducing government spending and boosting business investment through good old fashioned supply side reforms (cutting taxes and reducing overly burdensome regulations). Simply running the printing presses in order to avoid paying off your debts is no way for a great nation to behave.

- Sarah Palin

She told ya so.

Brian1972 on June 30, 2011 at 11:54 AM

ship of fools

cmsinaz on June 30, 2011 at 11:47 AM

Thread winner. +1000

theCork on June 30, 2011 at 11:55 AM

Prices at the pump, prices at the grocery store, utility rates… all going up. Everything’s risng except my paycheck.

skydaddy on June 30, 2011 at 12:16 PM

Yeah, along came Mr. Goodtrips
Looking for a new a ship
Come on, people better climb on board
Come on, baby, now we’re going home
Ship of fools, ship of fools

shibumi on June 30, 2011 at 12:20 PM

Prices at the pump, prices at the grocery store, utility rates… all going up. Everything’s risng except my paycheck.

skydaddy on June 30, 2011 at 12:16 PM

The inflation caused by the outrageous printing of money hasn’t really hit yet, because banks are sitting on that money due to lack of demand from borrowers. Once that dam breaks the inflation will hit us like an avalanche.

Worse, QE3 is coming.

slickwillie2001 on June 30, 2011 at 12:21 PM

Transferring wealth from people with positive bank balances to people with stocks in Banks. Not helping.

Count to 10 on June 30, 2011 at 12:32 PM

This deflation talk makes me laugh.

If you calulate inflation the same way they did in the Carter years, it’s over 10%. They rejiggered the formula to make it look lower later on.

The numbers from the government are pure fantasy. If we knew the real numbers, there would be rioting in the streets.

Rebar on June 30, 2011 at 12:33 PM

From the Framing to the birth of the Federal Reserve money lost 5% of its value.

From the Fed to 2008 your money has lost 95% of its value.

Back in the 70′s and 80′s I could reliably move the decimal point one place to the left to get Depression Era prices… that started to become unreliable in the 90′s… so much for the lovely fiat currency concept. As soon as gold gets to $3k/oz then you can move the decimal two places to the left. Perhaps then we should do a 100:1 currency revaluation and go back to the gold standard.

ajacksonian on June 30, 2011 at 12:57 PM

the Fed’s effort to avert a slip into another recession and toward deflation, or falling prices.

That always cracks me up. Exactly what product has dropped in price in the past 3 years???? Healthcare has skyrocketed. Food costs have skyrocketed. Gas has more than doubled!

And yet Timmy is worried about falling prices. The only answer is that they are lying to the morons who are also their base.

jeffn21 on June 30, 2011 at 1:33 PM

QE3 begins in September, that’s what I am seeing from certain quarters. Then hyperinflation begins.

Vatican Watcher on June 30, 2011 at 1:36 PM

The problem with the economy is not the money supply, but the economic and regulatory policies of the Obama administration. Until those change, we won’t pull out of the stagnation cycle we’ve seen for the past two years.

Exactly. Obama and his Eat-the-Rich progressives have completely spooked American Industry. That’s not going to change until he and his operatives are private citizens again.
We’ve just got to hold on until then.

Murf76 on June 30, 2011 at 2:05 PM

It is very simple. The gov’t needs to get the h*ll out of the way of We, the People and our capitalism and we will produce energy and goods and services and wealth. The only thing wrong with this country and our economy at this point is the federal government. Get them out of the way and the states with freest economic policies will go gang busters and the generationally liberal states will slide down into the economic despair they deserve.

Not only will this get us out of this problem but it will make very clear the difference between freedom and liberalism.

deepdiver on June 30, 2011 at 2:11 PM

TITANIC 2: This time, lets aim directly AT the iceberg!!!

What could go wrong???

Also, we’ll travel lighter this time, because we’re not taking any life boats.

landlines on June 30, 2011 at 11:25 AM

Well, technically, if the Titanic had hit the iceberg head on, probably only the forward two compartments would have been breached, and the ship could have survived.

Vashta.Nerada on June 30, 2011 at 2:18 PM

Ed, yer captions are fantastic.

Schadenfreude on June 30, 2011 at 2:36 PM

Wolf!!! Wolf!!!

Wooooooolf!!!!!

landlines on June 30, 2011 at 3:54 PM

END THE FED

Nelsen on June 30, 2011 at 4:44 PM

deflation, or falling prices,

Deflation is a decrease in credit and money supply.

AshleyTKing on June 30, 2011 at 7:04 PM

Thanks to QE2 the money that would have gone to invigorating the economy was spent on food, and gas.

Slowburn on June 30, 2011 at 8:28 PM