SUMMARY:
The Federal Reserve has finally stopped pumping billions into the monetary system as of October of 2014 (This was known as QE3 - the third quantitative easing). The Fed didn't pull the plug quickly, but tapered the infusion to zero...for now. This was to wean Wall Street slowly, so as not to upset the markets. I suspect if the economy stumbles again, we will see a QE 4, but it would be highly doubtful for several reasons. The stock market is still stable, employment is up, interest rates and inflation are low, and there is generally more optimism.
DEBRIEFING:
With the conclusion of QE3, I thought it prudent to see the results and how it has affected America.
It's easy for me to spout off numbers and indicators, but my favorite is the DIY stores. I visit the stores almost daily, picking up supplies and examining the new products. At the height of the recession it was almost a ghost town and employees would hover around me constantly, trying to look busy. Today the activity in the stores is busy, and it is evident that people are spending at normal rates.
The goal was to stabilize the economy, and as mentioned in the Summary it seems to have occurred. Whether or not there is a correlation between economic growth and Quantitative Easing is up for debate.
With all this good news, so comes the bad. There are still areas that are casualties of the economic war, such as the widening income gap between rich and poor, the black segment of the population being unemployed at twice the rate of whites, and a decline of median income to a level back in the 90's, to name a few. It is easy to gloss over the spillover effects of a recession and to point to one major contributing factor of success, but it is rarely that simple - as my several examples indicate.
President Obama likes to take credit for many of the good that has taken place in the economy, as noted in his most recent State of the Union speech. But presidents have little overall effect on what happens. For example, In 2010 Obama was quoted as saying "the days of cheap and easily accessible oil were numbered". In other words, he expected gasoline prices to increase from that point on. He probably never expected himself to say, in the 2015 State of the Union, "and thanks to lower gas prices and higher fuel standards, the typical family this year should save $750 at the pump." Obama is incorrect to say that higher fuel standards have something to do with savings. However, he is correct to conclude that the lowering of gas prices allowed the average citizen to reap the benefits. But the real credit and thanks should go to the initiative of private gas corporations, who believed drilling would work. It stimulated greater competition in the world and forced foreign countries to drop their price, ultimately bringing fuel costs down to record lows.
Presidents can either hinder economic conditions by delaying recovery or give it a shove in the right direction. It usually is in the form of regulations and taxation, where business feels it the most. But the U.S. economy is like a big ship crashing through the waves of adversity. Creative companies are the economic engine of the ship, pressing forward at great speed - if allowed to. The president more or less controls the rudder, which keeps the ship straight and gives the passengers comfort; or at times turns the ship such that the waves of adversity crash sideways, resulting in great discomfort and hardship.
In fact, Europe has just begun their own QE stimulus package. I suspect they saw the growth in the U.S. and expected they may be able to reap some benefits as well. Countries like Greece and Spain, with unemployment over 23%, most likely will welcome the prospect. These expansionary monetary policies usually weaken an economy's exchange rate, which boosts exports...most likely breaking the economic stagnation and lack of confidence. However, as wonderful as this stimulus may be, it still won't address other casualties that come into play. An example of this would be Germany's widening gap between the rich and poor...even the strongest economy in Europe has its problems.
Final notes:
I sense a new era of non-obligation in the world. Europe traded austerity (paying their debts) for a stimulus (going into debt). It is difficult for a region of the world to be responsible (and at the same time remain competitive), all while there is a spending spree in the U.S.
In the end, the hard facts will have to be addressed at some point, and the piper will have to be paid. This may come in the form of a new monetary policy (i.e. changing the U.S. dollar as the worlds Reserve status currency to something new), a major war or wars that could topple major economies (these wars could take the form of military action, economic strategies, or even cyber attacks), or natural occurring events that affect life on earth (such as astrological, geological, or climatological conditions). Pray none of these things happen.
I don't wish to sound pessimistic, but we humans are in a constant position of fragility. Living only for the present does not serve our descendants well. If we wish mankind to live in a better future, it is imperative we cast off our selfishness, think clearly, be willing to sacrifice, make the tough decisions, and take responsible steps for humanity to prosper...better sooner than later.
For those of you who want the cliff notes on the QE thing, let me take a moment to quickly explain how quantitative easing works.
In 2008 QE1 was initiated to combat the flagging economy at the end of the Bush administration (a $700 billion bailout plan). This stimulus had little effect on the economy. In 2011, during the Obama administration QE2 (a $600 billion bailout) was initiated; it also had little effect on the stagnant economy. In 2012, The Federal Reserve pushed further with QE3 or sometimes called "QE infinity," because the Fed promised an on-going amount of $85 billion per month of infusion into the system until the economy recovered. In 2014, the economy improved enough so that the Federal Reserved "tapered" those billions to smaller levels per month until it formally ended in October '14.
At this point, I will digress into a description of the monetary process. For ease of discussion I will use money and currency interchangeably...although in actuality currency is a more illusive term.
When the government begins a stimulus, the process is as follows:
(1) Funds are needed for spending projects aimed at job creation and revival of an economic slump and with the Federal Reserve's help, the U.S. Treasury issues bonds (more or less IOUs). This increases the National Debt.
(2) The bonds are auctioned off to major world banks at an open market.
(3) The banks receive payment from the Federal Reserve (The U.S. government's banker) for the bonds in the form of checks (the Fed's version of IOUs).
(4) The banks provide money for businesses and the treasury so they can fund the government projects.
(5) Americans earn income on those projects and put their money into local banks (who borrow most of the money and invest it),
(6) This invested money multiplies, helping the supply of currency to grow within the economy.
(7) The next year, the Treasury oversees the IRS as it takes a percentage of that earned income to pays off the IOUs the Federal Reserve made.
(8) This reduces the amount of bonds in the Reserve and lowers the National Debt.
Note: Just like the average citizen, if the U.S. borrowing exceeds income the debt grows; if income exceeds borrowing the debt shrinks. With the implementation of the stimulus, debt grew faster than could be absorbed. Only until sometime in the future (if the economy is strong) can we expect or hope the debt will be reduced.
The Federal Reserve is not like the average citizen. It had no obligation to pay itself back and could have continued to pump IOU checks into the system as long as it felt necessary for the economy to recover...which is exactly what it did. It was a risky venture (to be discussed on another day) that evidently seemed to pay off, for now.
http://www.bankrate.com/finance/federal-reserve/financial-crisis-timeline.aspx
http://www.statista.com/statistics/268830/unemployment-rate-in-eu-countries/
The goal was to stabilize the economy, and as mentioned in the Summary it seems to have occurred. Whether or not there is a correlation between economic growth and Quantitative Easing is up for debate.
With all this good news, so comes the bad. There are still areas that are casualties of the economic war, such as the widening income gap between rich and poor, the black segment of the population being unemployed at twice the rate of whites, and a decline of median income to a level back in the 90's, to name a few. It is easy to gloss over the spillover effects of a recession and to point to one major contributing factor of success, but it is rarely that simple - as my several examples indicate.
President Obama likes to take credit for many of the good that has taken place in the economy, as noted in his most recent State of the Union speech. But presidents have little overall effect on what happens. For example, In 2010 Obama was quoted as saying "the days of cheap and easily accessible oil were numbered". In other words, he expected gasoline prices to increase from that point on. He probably never expected himself to say, in the 2015 State of the Union, "and thanks to lower gas prices and higher fuel standards, the typical family this year should save $750 at the pump." Obama is incorrect to say that higher fuel standards have something to do with savings. However, he is correct to conclude that the lowering of gas prices allowed the average citizen to reap the benefits. But the real credit and thanks should go to the initiative of private gas corporations, who believed drilling would work. It stimulated greater competition in the world and forced foreign countries to drop their price, ultimately bringing fuel costs down to record lows.
Presidents can either hinder economic conditions by delaying recovery or give it a shove in the right direction. It usually is in the form of regulations and taxation, where business feels it the most. But the U.S. economy is like a big ship crashing through the waves of adversity. Creative companies are the economic engine of the ship, pressing forward at great speed - if allowed to. The president more or less controls the rudder, which keeps the ship straight and gives the passengers comfort; or at times turns the ship such that the waves of adversity crash sideways, resulting in great discomfort and hardship.
In my opinion, the QE is a Keynesian concept that showed its colors when it buckled under stagflation in the 1970s. But governments love Keynesian economics because it can be used to justify wasteful projects and feeds into big bureaucracy. Pumping money into a system to entice companies to invest or hire wasn't the answer...in this case. It made wall street happy and less nervous...sort of like filling up on cotton candy - feels and tastes great, but it ain't healthy. I attribute most of the economic gains to the American entrepreneur. Businessmen who really knew how to work around the system by creating a new demand for products, which in turn created jobs, and ultimately got the economy rolling again. It was as if the business community figured out how to get America to the dining table of healthy food so the QE cotton candy could be set aside.
Another advantage for the U.S. is that while the economy continues to gain momentum, the rest of the world continues to struggle. Therefore, America has still been the best place for other countries to invest their confidence with currency.In fact, Europe has just begun their own QE stimulus package. I suspect they saw the growth in the U.S. and expected they may be able to reap some benefits as well. Countries like Greece and Spain, with unemployment over 23%, most likely will welcome the prospect. These expansionary monetary policies usually weaken an economy's exchange rate, which boosts exports...most likely breaking the economic stagnation and lack of confidence. However, as wonderful as this stimulus may be, it still won't address other casualties that come into play. An example of this would be Germany's widening gap between the rich and poor...even the strongest economy in Europe has its problems.
Final notes:
I sense a new era of non-obligation in the world. Europe traded austerity (paying their debts) for a stimulus (going into debt). It is difficult for a region of the world to be responsible (and at the same time remain competitive), all while there is a spending spree in the U.S.
In the end, the hard facts will have to be addressed at some point, and the piper will have to be paid. This may come in the form of a new monetary policy (i.e. changing the U.S. dollar as the worlds Reserve status currency to something new), a major war or wars that could topple major economies (these wars could take the form of military action, economic strategies, or even cyber attacks), or natural occurring events that affect life on earth (such as astrological, geological, or climatological conditions). Pray none of these things happen.
I don't wish to sound pessimistic, but we humans are in a constant position of fragility. Living only for the present does not serve our descendants well. If we wish mankind to live in a better future, it is imperative we cast off our selfishness, think clearly, be willing to sacrifice, make the tough decisions, and take responsible steps for humanity to prosper...better sooner than later.
Further additional and maybe boring information.
What is a stimulus or quantitative easing?For those of you who want the cliff notes on the QE thing, let me take a moment to quickly explain how quantitative easing works.
In 2008 QE1 was initiated to combat the flagging economy at the end of the Bush administration (a $700 billion bailout plan). This stimulus had little effect on the economy. In 2011, during the Obama administration QE2 (a $600 billion bailout) was initiated; it also had little effect on the stagnant economy. In 2012, The Federal Reserve pushed further with QE3 or sometimes called "QE infinity," because the Fed promised an on-going amount of $85 billion per month of infusion into the system until the economy recovered. In 2014, the economy improved enough so that the Federal Reserved "tapered" those billions to smaller levels per month until it formally ended in October '14.
At this point, I will digress into a description of the monetary process. For ease of discussion I will use money and currency interchangeably...although in actuality currency is a more illusive term.
When the government begins a stimulus, the process is as follows:
(1) Funds are needed for spending projects aimed at job creation and revival of an economic slump and with the Federal Reserve's help, the U.S. Treasury issues bonds (more or less IOUs). This increases the National Debt.
(2) The bonds are auctioned off to major world banks at an open market.
(3) The banks receive payment from the Federal Reserve (The U.S. government's banker) for the bonds in the form of checks (the Fed's version of IOUs).
(4) The banks provide money for businesses and the treasury so they can fund the government projects.
(5) Americans earn income on those projects and put their money into local banks (who borrow most of the money and invest it),
(6) This invested money multiplies, helping the supply of currency to grow within the economy.
(7) The next year, the Treasury oversees the IRS as it takes a percentage of that earned income to pays off the IOUs the Federal Reserve made.
(8) This reduces the amount of bonds in the Reserve and lowers the National Debt.
Note: Just like the average citizen, if the U.S. borrowing exceeds income the debt grows; if income exceeds borrowing the debt shrinks. With the implementation of the stimulus, debt grew faster than could be absorbed. Only until sometime in the future (if the economy is strong) can we expect or hope the debt will be reduced.
The Federal Reserve is not like the average citizen. It had no obligation to pay itself back and could have continued to pump IOU checks into the system as long as it felt necessary for the economy to recover...which is exactly what it did. It was a risky venture (to be discussed on another day) that evidently seemed to pay off, for now.
http://www.bankrate.com/finance/federal-reserve/financial-crisis-timeline.aspx
http://www.statista.com/statistics/268830/unemployment-rate-in-eu-countries/
http://www.wsj.com/articles/ecb-announces-stimulus-plan-1421931011
http://www.iter.org/newsline/136/300
http://www.bloombergview.com/quicktake/federal-reserve-quantitative-easing-tape
