From Russia Today (RT) is this bit:
Nevertheless, optimism isn’t universal when it comes to what ending QE3 means for the world economy.
“Well there are some improvements, but we can’t say that it is recovering as everyone hoped,” Nour Eldeen Al-Hammoury, a chief market strategist at ADS securities in Abu Dhabi, told Euro News recently. “GDP is growing based on the inventories, which doesn’t mean that sales are increasing. The slack in the economy remains and so far there is no clear strategy on how this slack will be resolved. Moreover, the slowing down in Europe and Asia will be something to consider as the US economy is unlikely to grow on its own.”
So we’ve got inventory build, but not a lot of sell through… Hmmmm….
They then give an interesting ’round robin’ of other folks. Yes, it’s RT. Yes, they have an agenda so will be picking quotes. But still, not an enthusiastic set of folks:
Even in the west, that pessimism is present: Pedro Nicolaci da Costa wrote for The Wall Street Journal this week that the Fed may deploy another round of quantitative easing if the decision to end the third series proved to be unsuccessful, which, according to his report, may be the case.
“Many of the studies of large-scale asset purchases, known as quantitative easing or QE, agree they worked very well to prevent deflation and stabilize the financial system during the 2008 crisis, but disagree about how effective the programs have been in boosting growth since then,” da Costa wrote.
Although Bernanke has attributed QE with cutting unemployment, da Costa wrote, Fed researchers and academic economists have for years studied the practice and are split with regards to how successful the rounds have been, and what the eventual outcome will be when all is said and done.
“I do think they’re overly optimistic,” Barbara J. Cummings of the Boston Private Bank & Trust Company told CNBC this week. “The market and the Fed are definitely saying two different things. And the market is right. It usually is.”
To some, the outcome is even drearier. “Without another dose of stimulus, the US will likely slide into recession,” Worth Wray, chief strategist at Mauldin Economics, predicted to Equities earlier this month.
So The Fed is trying to just stop buying MORE “assets” (continuing to roll over the existing $Trillions as they mature) and it might or might not work. Then the growth in the economy is to some significant extent in building inventory, not all sell through. This after 6 years of “recovery” and $Trillions of “stimulus”. With food and fuel (and hotel rooms and…) prices up significantly per my purchase history, While pay is not and while jobs are still dear. Sure sounds like stagflation to me…
How does the money velocity / supply picture look? ( A discussion of VM = PQ was in comments on the prior thread here: http://chiefio.wordpress.com/2014/10/28/the-present-eu-economic-problem-and-the-incipient-usa-one/ remember that it is something of a descriptive tautology. Velocity x Money supply = Prices x Quantity. )
And how much money?
M2 is stuff like currency and checking deposits. The Fed used to report M3 (that included some longer term holdings in banks) but stopped. Similarly they used to report something called BOGUMBNS that was a very broad bucket full of all sorts of bank and similar holdings. Now that is replaced by Mbase that is similar, but different… For more, see http://en.wikipedia.org/wiki/Money_supply http://en.wikipedia.org/wiki/Monetary_base that have nice graphs too. Mbase includes the stuff the banks are sitting upon in their vaults and at The Fed.
Now notice that the Velocity line looks much flattened. It is still the same line, just scaled so that it is on the Mbase scale. Gives a bit of clue how much The Fed et. al. have monetized things sitting in their vaults. But is it ONLY The Fed? How have money supplies been growing in other parts of the world?
Hmmm…. Looks like all the major economies of the “western world” are pumping money supply in parallel. (and in the wiki on Money Base you can see the EURO money base rising about like the US$ one, so they, too, are doing a TARP of some sort…) You folks smug in your UK Pound have the same problem, per this graph. But the one I find interesting is Japan. Notice that in about 1980 – 1990 they were slow parabolic. Then tried to stop it, and transitioned into a long nearly linear ramp (with a slight rise at the end). Japan had a deflation interval about then, and avoided a collapse, but has never quite ever recovered “good times” since. IMHO, they are the model we are all trying to follow now. This argues that “good times” are on hold as we accept “tolerable” for a generation. But that is just a guess on my part.
What about those ‘special’ places like China and Russia? Lets add them:
Now some extra expansion of M2 is reasonable when an economy is rapidly expanding. As the Q of stuff sold goes way high, to keep P stable, either V has to rise a lot, or M can increase to match. But look at those curves and tell me that Russia is not printing like crazy and Brazil too. We are in a world that is awash in paper money, and it is still not “stimulating” enough. IMHO due to policy actions that throttle real productivity (and China poaching what growth is happening via Mercantilist Policy).
At present, metals (gold, silver) are still in a funk too. No joy holding them.
So what does all this mean? What is going to happen? At this point I don’t have much of an opinion. I’m still in the “problem admiration” phase. But I’d speculate that the Japanese model is the “goal” (that is, semi-stagnant and ‘good enough’ but not ‘good times’) and the reality will not be as clean. Especially in the Euro Land area. (Too many social / cultural stresses and divergences). Also job recovery is dismal:
Hard to find anything that makes the USA unemployment data look good, but in comparison to the EU, we look great. Never mind that folks with Honors Degrees are getting jobs serving coffee… (someone I know) and that others are taking significant pay reductions or part time jobs. At least we have some kind of job growth. But that is not the stuff of grand recoveries nor of ‘good times’. But the EU data just look dismal.
IMHO we had a huge asset bubble (due to policy shoving tons of money, literally tons of it, at housing; and the follow on of ‘creative financing’) that the globe has been trying to monetize ever since. All in an attempt to hide the stupidity of a policy that forced lenders to lend for homes to folks with no ability to repay and in districts that were a poor investment. That collapsed, and we’ve been trying to prevent the recognition of the reality (over building of assets in the wrong places owned by the wrong people at the wrong prices) ever since. This will take a generation to diffuse (as the mortgages run for 30 years…) and during that time, we have stagnation.
Banks (especially Central Banks) are attempting to monetize all that crap, and putting those $Trillions (or € Trillions) on their balance sheets as ‘assets’. Eventually this will spread that ‘value’ into the entire economy as price inflation. But since none of this produces actual productivity growth or real goods production, we have M rising, Q stagnant, and V plunging. Prices will wobble upward as the difference between M and V rates of change. We can only hope that a lot of Mbase doesn’t matter as long as M2 is kept lower… “But hope is not a strategy. -E.M.Smith”…
That it is global, and that the BRICS are in the pickle too, does not bode well at all. It also implies that doing ‘currency compares’ across those currencies will make everything look fine, as they move together. We need a different ‘rubber ruler’ to measure them against. That metals have dropped implies that we don’t have enough economic activity to make those assets interesting (and inflation fears are offset by bad times…) and they, too, are not a good ruler of value. Sigh.
OK, time for work. So I’ll ponder all this a while and try to find a reasonable way to measure the value of all those piles of paper and metals. It is clear that the formal government measures and currencies are not fit for that purpose. In the mean time, if the present high snow levels and cold oceans are decent predictors, it is going to be a long cold winter with rising food and fuel prices. Layering onto that “necessarily skyrocketing” electricity prices (via government policy) is not going to be a good idea. Squandering what productive capacity we have on building boondoggles (like wind parks) is just going to make the problem worse. (REAL productive capacity needs to grow, not ‘feel good / works bad’ government projects and subsidies).
The only solace I can take in this (so far) is that the folks raking in buckets of currency / subsidy / ‘assets’ are getting loads of ‘funny money’ rapidly headed to low value and loads of ‘assets’ that are anything but. Unfortunately, the rest of us are not even getting that.