The recent economic data leave little doubt that the economic recovery in the United States is anemic at best. There was much celebration over the November jobs report. This showed a gain of 151,000 jobs. This was better than the near-zero number anticipated by most economists, but should hardly provoke cries of joke. The economy must create 100,000 jobs a month just to keep even with the growth of the labor force, which means that it will take more than a decade at this pace to get back the 7.5 million jobs lost to date.
The picture painted by the data on third-quarter GDP, which was released the prior week, was even bleaker. Most reports focused on the 2.0 percent growth number, which was slightly higher than had been expected.
However these reports missed the fact that most of this growth was due to the extraordinary pace of inventory accumulation in the quarter. The rate of accumulation in the third quarter was the second-highest ever, adding 1.4 percentage points to growth for the quarter. Excluding this jump in inventories, the economy grew at just a 0.6 percent annual rate in the third quarter. If inventory growth returns to a more normal level, fourth quarter growth will likely be negative.
The Fed's decision to try another round of quantitative easing must be understood in this context. The U.S. economy is operating far below its potential and is not likely to return to potential output any time soon without some outside boost. The Fed's decision to buy $600 billion in government bonds over the next eight months is a step in this direction.
This is a follow up to an earlier round of quantitative easing announced at the beginning of 2009 in which the Fed bought $1.25 trillion of mortgage-backed securities and another $300 billion of government bonds. That move helped to bring down long-term interest rates and stabilize the economy at a time when it was sliding rapidly.
The new move should also help to lower interest rates; although the effect is likely to be limited. With long-term interest rates already at extremely low levels, it is unlikely that the Fed's new bond purchases will lower them much further. A decline of 30-40 basis points would probably be the best that can be expected. This would lead to a somewhat smaller decline in private sector rates, like mortgage interest rates and corporate bond rates.
This will help to promote growth, but it is not likely to qualitatively change the basic economic picture. A modest drop in mortgage interest rates will not revive the housing market nor will lower interest rates lead to an investment boom. The positive stock market response may lead to some additional consumption through the wealth effect, but here too the impact is likely to be modest.
The largest effect will likely be on the value of the dollar. With the Fed quite explicitly determined to keep interest rates low, investors are likely to seek alternatives to dollar assets. This will cause the dollar to drop, which will in turn improve the U.S. trade balance. The downward drift of the dollar is something that must happen and a second round of quantitative easing may bring the drop about sooner.
Still, the Fed's move is a disappointment. Given the severity and the duration of the downturn, $600 billion in bond purchases is a very modest measure. The more effective policy that the Fed opted not to pursue is inflation targeting. If the Fed targeted a moderate rate of inflation (e.g. 3-4 percent), it could change expectations and therefore behavior.
If businesses expected that prices for most goods and service would be 12-16 percent higher in four years, then they would be far more willing to undertake investment even in the current economic climate. A moderate rate of inflation would also help households escape from indebtedness. While their debt is fixed in nominal terms, if inflation raised wages by 15 percent then it would reduce the burden of the debt by 15 percent. This should also boost consumption and growth.
House prices should also rise roughly in step with inflation. A 15 percent rise in prices over the next four years would pull many people out from being underwater. It would add trillions of dollars to homeowners' wealth.
The Fed's holding of debt also has another benefit that has received far too little attention. Insofar as the Fed holds the government's debt, the interest payments on this debt pose no burden for the government since the interest received by the Fed is refunded right back to the Treasury. Last year, the Fed refunded $77 billion in interest to the Treasury, an amount equal to nearly 40 percent of the government's net interest payments. The Fed's decision to buy and hold debt prevents the interest on this debt from posing a burden to the Treasury.
In short, QE II, as this second round of quantitative easing has been dubbed, is a positive step in the current economic situation. Unfortunately, it is not nearly enough to fully counteract the severity of the downturn.
This piece originally appeared in the Guardian.
http://www.financemetrics.com/quantitative-easing/
It is far better to do nothing than to create more havoc and make things worse. As some of the economists said today on the various news channels, they believe that what the fed is doing is wrong and will hurt the economy in the long run.
Everyone knows this is just a ploy to bail out banks. The people in the US do not want to bail out the banks again.
The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy.
Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the U.S. by one level to A+ from previous AA with “negative†outlook.
The Chinese rating agency said the downgrade reflected the U.S.’s deteriorating debt repayment capability and drastic decline of the U.S. government’s intention of debt repayment.
“The serious defects in the U.S. economy will lead to long-term recession and fundamentally lower the national solvency,†Dagong said in a report.
The Chinese rating agency said the Federal Reserve’s new round of quantitative easing would further depreciate the U.S. dollar and was entirely counter to the interest of the creditors.
The Federal Reserve last week decided to buy 600 billion U.S. dollars of U.S. Treasury securities and other assets held by banks in a bid to inject fresh funds into the economy and bring down long-term interest rates.
www.gonzalolira.blogspot.com
www.gonzalolira.blogspot.com
The rules whose imposition define neoliberalism are generally designated euphemistically as "market" rules, avoiding the direct reference to capital. In this use of the term "market," various types of mechanisms are at issue. The labor market refers to the tightening up of rules concerning hiring, layoffs, wages, and labor conditions. This market has been a favorite target of neoliberalism. The other market, directly at stake here, is that of capital. Neoliberalism has indeed completely changed the conditions under which the capital markets function. There are many aspects to this the centrality of the stock market and of capital in general, free international mobility of capital, and so on. Finally, neoliberalism is indeed the bearer of a process of general commercialization of social relationships, and that is one of its more shocking aspects. But it is the logic of the capitalist relationship that extends and governs the whole process, in accordance with its rules.â€
Capital Resurgent
Roots of the Neoliberal Revolution
Gerard Dumenil
Dominique Levy
HARVA R D U N I V E R S IT Y P R E S S
London, England . 2004
1. THE RULE OF THE MARKET. The falsehood called the efficient market hypothesis. To convince us this is good, propagandists tell us "an unregulated market is the best way to increase economic growth; markets are self correcting." It's Reagan's "supply-side†but somehow the wealth didn't trickle down.
2. CUTTING PUBLIC EXPENDITURE FOR SOCIAL SERVICES like education and health care, and maintenance of roads, bridges, water supply -- again in the name of reducing government's role. Of course, they don't oppose government subsidies and tax benefits for business.
3. DEREGULATION. Reduce government regulation of everything that could impede profits, regardless of the economic destruction it causes; the recession and bailout. Reducing wages by de-unionizing workers and eliminating workers' rights and not enforcing labor laws.
4. PRIVATIZATION. Sell state operated enterprises, goods and services to private investors. This includes banks, key industries, railroads, toll highways, electricity, schools, hospitals and even fresh water. Although usually done in the name of greater efficiency, privatization concentrates wealth in fewer hands making the public pay even more for its needs.
5. ELIMINATING THE CONCEPT OF "THE PUBLIC GOOD" or "COMMUNITY" and replacing it with "individual responsibility." Pressuring the poorest people in a society to find solutions to their lack of health care, education and social security all by themselves -- then blaming them, if they fail, by calling them "lazy."
Follow the money...
OK, the government buys back bonds.
From whom?
Those who hold bonds. Who holds bonds?
The rich. Corporations. Banks. Retirement funds.
OK, what are THEY going to do with that money?
The point of the exercise is SUPPOSED to be stimulus. If you want stimulus, you want to put cash into the hands of people who will spend the cash in places where that cash will immediately be spent again; at the grocery, at the cleaners, at the gas station, etc.
Buying bonds back, thus putting cash into the hands of people who currently are sitting on, what, hundreds of billions of dollars, waiting for an uptick in the economy before they invest in anything is not likely to be very stimulating. Why would that stimulate anything?
Oh, you'll see all that cash again. Right at the point in the upswing, where everyone is piling into the market to make a killing, because things look rosy - just when we DON'T need to see it.
But, in the meantime, it's money wasted.
The rules whose imposition define neoliberalism are generally designated euphemistically as "market" rules, avoiding the direct reference to capital. In this use of the term "market," various types of mechanisms are at issue. The labor market refers to the tightening up of rules concerning hiring, layoffs, wages, and labor conditions. This market has been a favorite target of neoliberalism. The other market, directly at stake here, is that of capital. Neoliberalism has indeed completely changed the conditions under which the capital markets function. There are many aspects to this the centrality of the stock market and of capital in general, free international mobility of capital, and so on. Finally, neoliberalism is indeed the bearer of a process of general commercialization of social relationships, and that is one of its more shocking aspects. But it is the logic of the capitalist relationship that extends and governs the whole process, in accordance with its rules.â€
Capital Resurgent
Roots of the Neoliberal Revolution
Gerard Dumenil
Dominique Levy
HARVA R D U N I V E R S IT Y P R E S S
London, England . 2004
Crisis economy formation measures must be implemented now, or this great nation is doomed. The President, his entire cabinet, must resign, removed from office, for the good of the nation, the protection of the population. The indifference to the population's suffering, the promotion of terrible austerity measures as a countermeasure to collapse speaks volumes of this Administration and the Republican leadership.
Mr. Lyndon LaRouche must be given a position in the government to create and implement the necessary economic recovery measures.
The United States must terminate the monetary system: Reinstate Glass-Steagall in US banking now, put the Fed into bankruptcy protection, recover the bailout trillions, banks that qualify will join the US National Bank under Glass-Steagall standards. Enact the Bank and Homeowners Protection Act. Stop the Perpetual War.
The United States must activate its' economic platforms: expand Social Security and Medicare, Expand NASA space programs, the source of America's strength. Start the Nuclear Fueled Energy Economy, Construct the interstate water distribution system proposed in the NAWAPA plan. These measures will employ 4-5 million Americans, reversing our crisis.
The US must commit itself to the redevelopment of the North American continent, to counterattack Globalization, and activate actual economic recovery.
If the recovery ever takes hold, a barrel of oil will be $100, in 5-6 years it's predicted to go to $200 a barrel because of peak oil. Because oil is priced in dollars a devalued dollar would make it even higher. We import more oil than we could ever ramp up to export goods and services over the next decade.
This would create jobs through the "Home star" and "Building Star" programs as outlined here:
http://pacenow.org/documents/Recovery_Through_Retrofit_Final_Report.pdf that precisely spells out both the public and private roles that creates a market through which private sector jobs are created.
House prices are still overvalued, proving what a scam the so called market price is.
If Helicopter Ben had paid off all residential mortgages in 2009 instead of buying 1.25 trillion in mortgage backed (un)securities the economy would be near normal or maybe booming as homeowners spent the mortgage money into the economy.
When the Grand Theft that economists are calling the great recession is finally over, house prices should decline as the house ages, like car prices decline. The government should refuse to guarantee the mortgage on houses that increase in value, unless there is a significant addition to the house or the neighborhood goes commercial.
No, No No! All that would do is pay off the big banks for worthless assets! It's idiotic to print money out of thin air to interfere in the markets in any way whatsoever. The right thing to do back in 2008 was NOTHING. When a bank goes bankrupt, the assets are sold at a fair market price. No bank is going to buy an under-water mortgage at full value, so in the sale process the bad debt is destroyed. The bank that now owns the mortgage negotiates with the homeowner to work out an affordable payment on the now less-expensive house.
The banks still have trillions of underwater mortgage exposure. The government and the Fed bailouts are keeping the bad debt in the system and enabling more and more foreclosures. This new "quantitative easing" is just another bailout of the ultra-rich at the expense of the poorest of the poor. Time to put the big banks into receivership and end the menace of the Federal Reserve.
I am curious as to how the new members of Congress will take to the idea of no longer having control of how monies and resources are to be levied and distributed within our nation.
This economy hemmorages jobs while other economies are growing at 9%. If we continue to hide the obvious solutions to job growth and creation, we will soon be a nation of beggary and desperation.