Awaiting Ben Bernanke
That is the banner headline today in London’s Financial Times ‘Global Market Overview’ section. The opening sentence starts, “Financial markets remain calm…”
The Fed’s Open Markets Committee starts a 2-day meeting today. It will culminate on Wednesday with one of Bernanke’s famously anticipated press conferences where he will dryly read the carefully prepared FOMC statement outlining their decisions, and then take financial reporter’s questions.
The ritualistic FOMC reading has become the ‘new normal’ of post-Great Recession times.
How long will The Fed continue quantitative easing? That is the question on everyone’s mind.
The Fed and the markets have lost their way. QE is the addictive drug of our economic age.
Why have QE?
The U.S. economy continues languishing with tens of millions of Americans unemployed or underemployed and many millions more dropping out of the workforce or simply never entering it in the first place.
Officially, The Fed is pumping $85 billion/month indefinitely into the economy through asset purchases until unemployment drops to 6.5%.
Here is how QE is supposed to work…
Businesses in an under-performing economy lack the cash needed to expand their businesses enough to bring the economy back to full employment. To provide ready cash for economic stimulus The Fed purchases private-sector assets with Treasury securities issued by the U.S. Treasury Department. Those securities are immediately converted into cash which is deposited into Fed member bank accounts.
That money, in turn, then becomes available for business investments and home owner loans, etc. Business and homeowners take out loans, spend the money, the economy revives, millions of jobs are created, The Fed later sells it’s private-sector assets to pay back the U.S. Treasury and everyone lives happily ever after.
Unfortunately, that is not how things are turning out!
The QE Addiction
It is more profitable for companies to hold on to their new cash made from Fed asset purchases than it is to spend it. Instead of investing and restoring the economy back to full employment as The Fed intended, they just sit on their cash, keeping it in safe haven U.S. Treasury bonds.
They are sitting on over $2 trillion! The Fed adds $85 billion more each month.
With all their new-found wealth, company balance sheets look great. It has fueled a stock market rally the likes has never been seen before. Wall Street investors are happier than bees in a honey factory.
Wall Street billionaires are being fashioned every day, funded by taxpayer QE dollars, while the real economy remains stuck in neutral because of ineffective QE.
Even after QE has totally broke down, it is hard to change direction when you’ve been given the keys to the candy store.
Worse yet, not all Fed purchases are QE. Half of it is purchasing federal government debt.
Thus, both businesses and the federal government have a sugar daddy!
Nobody in the monied world wants that to change.
Everyone knows that unemployment isn’t gonna drop much any time soon. Logically, there should be no reason to think QE will end.
However, everyone also knows that QE is not working. Everyone knows QE is little more than a drug that, when withheld, will bring the house of cards down.
That is why everyone is so concerned over the FOMC statement. Will QE be brought to an end any time soon?
Tomorrow’s FOMC statement will be analyzed with computer precision to find out. A word changed here or there from the last FOMC statement will send volatile stock markets way up, or way down.
But none of it will have anything to do with unemployment or the real world economy.