Did QE Solve The Problem It Was Intended To Solve?

Quantitative Easing (QE), the large investment of the Federal Reserve Bank in U.S. Treasuries, was initiated in order to keep the cost of financing bonds low and thus encourage investment in stocks. Basically money moved away from bonds and toward stocks. This increased the value of stocks and decreased the value of treasuries over the last several years. This also has had the effect of raising the cost of commodities and thus inflating the cost of goods. Overall, this stimulus is inflationary and given the multi trillion dollar investment made by the Federal Reserve over the last few years has left us with over-valued stocks. Yet, at the same time, it has lowered the cost of borrowing since the government is paying lower interest on the treasuries.

Overall, the program was supposed to increase the value of stocks and increase housing values as well. It did both: stocks certainly rose and the value of housing has increased though less so than stocks. Why then has the program been generally regarded as good for Wall Street and the rich and not so good for Main Street. In fact, such a conclusion is substantially incorrect. Stock increases have reinvigorated retirement program assets and many in the workforce should be seeing IRA programs picking up substantially. At the same time housing value increases should be lowering the level of pain of most of those who were underwater in the immediate aftermath of the 2008 crisis. Thus, I would argue that many on Main Street have regained substantial net worth that was lost in 2008-2009.

Thus, spending well beyond the relatively low levels at which it may have been stimulated in the rich has been realized by substantial numbers within the middle class and upper middle class, who basically stopped spending in 2008-2010. Increases in spending by the rich would never have been enough to carry us as far as we have come. The rich always had enough to spend and thus buy what they needed. To be certain, many of them may have given up a few luxury items but alone they could have never carried the recovery as far as it has come. Evidence of considerable additional spending comes from added consumer confidence and has resulted in many new jobs over the last several years as the unemployment numbers have dropped from 10 percent of the work force to about 6.6 percent.

Some argue that the workforce has shrunk thus making the numbers look better than they are. Some of this apparent loss is perhaps coming from increases in the numbers in the work force in 2008-2009 who should have retired then, but waited and are are actually retiring only now. In 2008 through 2010 many delayed retirement since their IRAs were suddenly cut in half due to the substantial price drop in equity prices and the equally precipitous drop in housing values. Many at or near retirement age simply found themselves unable to retire even if they had reached the age when they had a planned to do so. Thus, for now, some of them at least, are playing catch-up. They appear to be dropping out of the work force, but when they delayed retirement they may have actually inflated its numbers. Also, now as they retire, the jobs they leave may perhaps have been consolidated with others or partially automated. The situation is complicated and defies simple interpretation.

Thus, the economy is improving substantially because of the QE program, but not sufficiently rapidly just yet to have had a clear and obvious impact on Main Street, which is going to catch up more slowly than we expect because of the above and for other more complicated reasons: (1) We are automating at an unprecendented rate due to sudden really rapid advances in artificial intelligence having a major effect on robotics and their computer control — some fundamentally new kinds of jobs may evolve from this, but we don’t really know, at this stage, what that will look like; (2) We are not solving the immigration problem due to the unwillingness of the Congress to come to grips with the matter. If this continues the net population of immigrants in the country may begin to drop. Their tax revenues will also drop. Their contribution to entrepreneurship will drop as well, and thus their contributions to net job creation. This, together with recent and perhaps continuing declines in the country’s birth rate, may move us toward net population decline just as the percentage of the workforce in retirement is starting to increase. This will make it yet more difficult to support both baseline social security and healthcare nets, and at the same time pay down the debt which has accumulated largely because of the financial crisis of 2008.

Perhaps we can still improve the net rate of economic growth and reduce the unemployment rate to under five percent in the next year or two, but unless we can deal effectively with the additional problems noted above for the longer term a full recovery of the economy may continue to allude us.


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