Recently, before a packed Commonwealth Club audience in San Francisco I addressed "Quantitative Easing", an issue of profound importance with significant domestic economic impact and global consequence. Alarming confusion and curiosity permeated the audience as many attendees exhibited their concern regarding today's economy and for tomorrow's forecast. Despite the expiration of Quantitative Easing, at the end of June 2011, anxieties remain among our fellow citizens in their attempt to discern solutions for our troubled economy. With profound confusion our citizens and corporate leaders further accentuate today's 'Crisis of Confidence'; earmarked by dissipating optimism in all segment of our lives and economy.
Quantitative Easing (QE) is a current monetary policy exercised, by my alum, The Federal Reserve Bank ("The Fed"). This topic is familiar to me and one that follows the publication by my team and me at YAM Media mid-last year 2010 of a paper entitled, "Quantitative Easing: A Curse or Blessing?
This is an economic topic of significant relevance, that impacts all, and an issue many remain unfamiliar with. Our confusion with today's economy often drains our confidence and dilutes our optimism to be decisive. Irrespective, whether in our private lives or as corporate citizens we all seek greater understanding with hope for remediation of today's 'Great Recession'.
Don't remain bewildered! We're fortunate that those entrusted with the magnanimous responsibility for resolving today's economic dilemma, are perhaps as confused, given the distinct idiosyncrasies of today's Great Recession; which we haven't experienced since the 'Great Depression' of the late 1920's. We are fortunate that Ben Bernanke and our Fed leaders are stridently exercising all economic measures to extract its recovery.
Undaunted, The Fed is utilizing its economic strength, monetary policies and tools in attempt to resuscitate today's economy. Including, implementing variations of a novel monetary policy, Quantitative Easing, to resurrect our stagnant economy that until recently was untried in our economic annals. Through the purchase of Treasury securities The Fed aided in lowering the yield of Treasury securities, most notably the 10 year Treasury, in attempt to consequently effect decreasing the costs of financing, which often is indexed to Treasury securities. Objectively, The Fed's goal to lower financing cost is grounded with aspiration to encourage borrowing, a critical stimulus for our economic recovery.
With the depletion of monetary tools and suffering from a 'Liquidity Trap' where interbank interest rates remain close to zero, The Fed adopted an unconventional mean, Quantitative Easing, to quell the ferocious economic Firestorm of late 2008. Without The Fed's injection of $1.7T thru QE I in late 2008, to our money supply the probability of systemic financial and global risk and global contagion beckoned as a perilous reality. Fortuitously, we avoided economic Armageddon!
Although, we successfully avoided this near economic catastrophe, the economy has precipitously remained on life-support. Borrowing has been limited by financial regulators, ridden with paranoia, cautiously managing bank risks. In 2010, commercial bank credit decreased 2.9%, lending by savings institutions fell 2.1% and, credit from non-financial institutions fell .9%. Various barriers confronted borrowers from accessing available credit, weakening confidence and optimism among individuals and corporations; except for exceptional gilt-edged enterprises.
Quantitative Easing's intent to incite borrowing was not a panacea in generating economic resurgence as 'Constructive Demand' remains benign; while confidence and optimism weaken. Despite the percentage of cash assets on corporate balance sheets which is higher than since 1964, industrial capacity remains at approximately 76% as corporate chieftains remain apprehensive and indecisive in committing to growth and hiring. As such, unemployment in late 2010 hovered at or above 10% and, when considering those with expired unemployment benefits, along with those underemployed the percentage nears 15%, or approximately 23MM workers. Certainly, our economy will not resurrect without support and investment from the private sector. Apprehension among individuals is evident as consumer demand decrease from 75% of our GDP in 2007, to approximately 70% today, while national savings increase to 5% from a depth of negative (2%) in 2007.
In November 2010, in attempt to resuscitate our economy The Fed implemented the second phase of Quantitative Easing, QE II. QE II, which expired at the end of June 2011, injected another $600B into our economy and along with the earlier $1.7T, The Fed has added $2.3T to our money supply; an approximate increase of 25%. The recent announcement in mid-September 2011 by the Fed's Federal Open Market Committee and their adoption of Operation Twist, which I termed in a recent announcement as Operation Twist ...& Shout will further attempt to fuel economic growth thru increasing our money supply by $400B. This is an illusion predicated on Hope, not a proven economic remedy, when we should focus on restoring 'Constructive Demand' to overcome today's 'Crisis of Confidence'. In contrast, the added liquidity enhances premonition to concerns for inflation; or worse with a stagnant economy, as the 1.3% annualized GDP reported for the second quarter of this year, the possibility of stagflation, a worse evil. Although, until recently, concerns for inflation seem benign as core inflation remains below 2%, while a key inflation factor, Personal Consumption Index, principally used by The Fed, remains at a year-on-year low of .5%.
Borne from economic necessity, The Fed continues to implement variations of Quantitative Easing which to-date has exhibited questionable results. QE has elevated The Fed to being the leading investor in U.S. Treasury securities. Consequently, QE has supported the insatiable national debt appetite of our U.S. Treasury, escalating it to new heights. Today, our country exhibits leverage characteristics similar to that of emerging nations than that of the leading global economy.
Quantitative Easing has dispelled any notion that we are dedicated to maintaining a strong Dollar, as various Presidential administrations have professed throughout the past few decades. Although, we're not alone, as The Fed influenced the European Central Bank as well as the Bank of England to exercise similar monetary measures. Whereas, other sovereignties have been less supportive of our QE actions and confront us with implicit threats of trade barriers; as their currencies strengthened. Effectively, QE has initiated an economic aura of 'Competitive Devaluation'. On our behalf, QE's monetary measures benefitted our export sector which increased 20% in 2010, and notably decreased our trade deficit. Alarmingly, QE has brought forth a new brinkmanship gambling upon the proclivity of foreign investors to not divest their investment in our Treasury securities.
Especially disconcerting when foreign investors until recently accounted for 65% of overall investors in U.S. Treasuries and our nation. The possibility of their divestiture of our Treasuries would inevitably drive Treasury yields higher along with costs of financing and, surely pro-long economic recovery. Although the costs of Quantitative Easing may seem exorbitant it has stabilized the malevolent economic Firestorm we've endured since late 2008. Evident from The Fed's recent Open Market Committee meeting the efficacy of Quantitative Easing remains indeterminable. Undoubtedly, we need to restore confidence and optimism among our corporate leaders and consumers to secure sustainable economic recovery. Quantitative Easing remains in limbo as The Fed ponders the implementation, or not, of further Quantitative Easing monetary measures. Leaving QE to undefined market forces in today's troubling global economy is not prudent and potentially counter-productive and de-stabilizing to our economy.
Monetary policy, in and by itself, will not re-establish sustainable economic stability nor restore confidence, constructive demand and optimism. We need the full cooperation and collaboration of the U.S. Treasury in establishing fiscal policies to encourage investment, while simultaneously carefully exacting budgetary reductions.
President John F. Kennedy expressed, "When written in Chinese, the word "crisis" is composed of two characters. One represents danger and the other represents opportunity." Today's epiphinal economic times requires the re-invigorative support of all to opportunistically establish the precepts for a better economy and society tomorrow.