"The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad. By now, the global repercussions are clear,developing economies with large current-account deficits,namely
Brazil,India,Indonesia, Turkey and South Africa, which benefited the most from QE-induced capital inflows, and they were the first to come under pressure when it looked like the spigot was about to be turned off.
When the Fed stepped back in its announced tappering of its buying program of long term securities,they enjoyed a sigh-of-relief rally in their currencies and equity markets.
90%. Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%
The problem continues to be the crisis-battered American consumer. In the 22 quarters since early 2008, real personal consumer expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.
Trapped in the aftermath of a wrenching balance-sheet recession, US families remain fixated on deleveraging – paying down debt and rebuilding their income-based saving balances. Progress has been slow and limited on both counts.
Brazil,India,Indonesia, Turkey and South Africa, which benefited the most from QE-induced capital inflows, and they were the first to come under pressure when it looked like the spigot was about to be turned off.
When the Fed stepped back in its announced tappering of its buying program of long term securities,they enjoyed a sigh-of-relief rally in their currencies and equity markets.
But there is an even more insidious problem brewing on the home front.
It has shifted its focus from the price of credit to influencing the credit cycle’s quantity dimension through the liquidity injections that quantitative easing requires. In doing so, the Fed is relying on the “wealth effect” – brought about largely by increasing equity and home prices – as its principal transmission mechanism for stabilization policy.
There are serious problems with this approach. First, wealth effects are statistically small; most studies show that only about 3-5 cents of every dollar of asset appreciation eventually feeds through to higher personal consumption. As a result, outsize gains in asset markets – and the related risks of new bubbles – are needed to make a meaningful difference for the real economy.
Second, wealth effects are maximized when debt service is minimized – that is, when interest expenses do not swallow the capital gains of asset appreciation. That provides the rationale for the Fed’s zero-interest-rate policy – but at the obvious cost of discriminating against savers, who lose any semblance of interest income.
Third, and most important, wealth effects are for the wealthy. The Fed should know that better than anyone. After all, it conducts a comprehensive triennial Surveyof Consumer Finances(SCF), which provides a detailed assessment of the role that wealth and balance sheets play in shaping the behavior of a broad cross-section of American consumers.
In 2010, the last year for which SCF data are available, the top 10% of the US income distribution had median holdings of some $267,500 in their equity portfolios, nearly 16 times the median holdings of $17,000 for the other90%. Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%
The problem continues to be the crisis-battered American consumer. In the 22 quarters since early 2008, real personal consumer expenditure, which accounts for about 70% of US GDP, has grown at an average annual rate of just 1.1%, easily the weakest period of consumer demand in the post-World War II era.
Trapped in the aftermath of a wrenching balance-sheet recession, US families remain fixated on deleveraging – paying down debt and rebuilding their income-based saving balances. Progress has been slow and limited on both counts.
QE benefits the few who need it the least. That is not exactly a recipe for a broad-based and socially optimal economic recovery".
Stephen Roach
Project-Syndicate
