Thursday, June 13, 2013

Fears of tapering are misplaced

Recent economic data continue to show no sign of any emerging weakness or unusual strength in the U.S. economy. The economy is likely continuing to grow at about a 2% pace, which is the average pace of the current business cycle expansion. Despite any notable changes in the health of the economy, the market has rather suddenly been gripped by fear that a tapering of the Fed's Quantitative Easing program—not a reversal, just a slower pace of asset purchases—puts the economy at risk. This fear is based on the assumption that the recovery has been primarily driven by QE, an assumption I think is unfounded. I see no logical connection between the Fed's purchases—which amount to swapping T-bill substitutes for notes and bonds—and the creation of new jobs. As I argued months ago, the Fed is not "printing money."

If there is any connection between QE and economic growth, it is that both are unprecedented: we've never seen the Fed purchase assets of such magnitude, and we've never seen such a slow-growing economy after such a deep recession. Indeed, it might make more sense to believe that QE has actually retarded the economy's growth—and that therefore a tapering of QE might actually boost growth—rather than to worry that a slow-growing economy might get even slower if the Fed begins to taper its purchases of notes and bonds.

Some brief notes on today's data releases:


Weekly claims for unemployment continue their downtrend. This suggests the labor market is getting more resilient by the day, as employers have done just about all the cost-cutting they need to.


Relative to the size of the workforce, layoffs have rarely been lower than they are today.


The number of people receiving unemployment insurance is down almost 21% in the past year. This continues to be one of the biggest changes on the margin in the U.S. economy, and it is a positive, since it increases the incentives for people to find and accept employment.


May retail sales were stronger than expected (+0.6% vs. +0.4%). To date there is no sign that the expiration of the payroll tax holiday (which caused withholding taxes to increase beginning in January) has had any significant impact on consumer spending. Real retail sales are up about 3.3% in the past year, and in the past six months they are up at 2.7% annualized pace.


The main problem with the economy has been a failure to thrive. Unemployment remains quite high, and the economy is operating at much less than its capacity. As the chart above suggests, retail sales are a little more than 10% below where they otherwise could have been if this had been a normal recovery. This, combined with the fact that inflation remains relatively low, is hardly evidence that the Fed has artificially pumped up the economy with QE.

10 comments:

William McKibbin said...

A thriving Federal government does not make for a thriving America...

William McKibbin said...
This comment has been removed by the author.
Benjamin said...

Egads--does Scott Grannis really believe that Ben Bernanke and the FOMC are engaging in QE for no discernible reason? That, in fact QE may be retarding economic growth?

QE is monetizing the debt, and replacing bonds with cash.

If you do not believe that add up federal debt, minus that owned by the Fed.

Banks have swollen excess reserves now. They can lend, and rising C&I loan volumes, and increased real estate buying, shows lenders are lending more.

You know, people criticizing the Fed's QE program fall into two camps: 1) That QE does nothing, just rates out bills for bank reserves and 2) that hyperinflation may soon result, because banks will lend out those reserves.

The third option, that bansk may in fact be prudently lending out their excess reserves seems to be on no one;s mind.

My complaint is that the Fed has not been aggressive enough nor provided the market with certainty that it will sustain QE for a long, long time, as in years.

When you hit ZLB recession, a central bank really has nowhere to go but heavy into QE.

Europe and Japan are examples of tight money applied to recessions. It just doesn't work.

As for me, I prefer boom times, fat city. I like making money, I like it when lots of people make money.

Print more money Ben Bernanke.







Mark said...

Dear Scott,

I read this blog regularly and regard it a a great source of fact and intelligent interpretation.

I wonder if you would be able to do an assessment on where you see the Euro Zone is today and what the indicators are for its near future

Thank you for your contributions

Brian Wesbury said...

Benjamin, the Fed "thinks" that interest rates should be below zero - that's what the Taylor Rule says. So, it engages in QE. That does not mean the Fed is right.

It could be, and this is what I believe, that a 0.13% federal funds rate is plenty low and that QE itself is having little impact.

So, we can expect some inflation, but not hyper-inflation.

Also, this explains the slow growth of the economy. It has nothing to do with the Fed and all to do with fiscal policy.

The Fed is no easier today than it has been in the past, but government is bigger and velocity is subdued. The end result is that the Fed is balloning its balance sheet with little to show for it other than great debate about whether it is useful or not.

In the meantime, the Plow Horse economy continues to plod along because its carrying the weight of a huge government.

William McKibbin said...

Ending QE would be good for bondholders, no doubt...

William McKibbin said...

PS: Who loses most if bonds blow up in the US...?

Scott Grannis said...

Re: the current state of the Eurozone

The Eurozone has a serious case of the Big Government Blues: too much spending, and tax rates too high. Austerity is needed, but most states are doing it the wrong way by relying more on tax increases than on cutting spending. Meanwhile the worst seems to have passed in regards to the economy, with some signs of gradual improvement.

I would expect to see continued but very slow and gradual improvement in the Eurozone economic climate. I wouldn't get optimistic until I see a clear shift in thinking in favor of cutting government and reducing tax rates.

Monetary policy, on the other hand, seems to be a big tighter than in the U.S., and that is why the euro remains relatively strong. I don't see a breakup of the euro.

William said...

Thank you, Mr. Wesbury. I enjoy watching your Wesbury 101 videos and find that you and Scott are usually in synch - and right on the money!

theyenguy said...

Thanks for the article.

You write The main problem with the economy has been a failure to thrive. Unemployment remains quite high, and the economy is operating at much less than its capacity. As the chart above suggests, retail sales are a little more than 10% below where they otherwise could have been if this had been a normal recovery. This, combined with the fact that inflation remains relatively low, is hardly evidence that the Fed has artificially pumped up the economy with QE.

QE, in all of its various stages, coming on now with Mortgage Backed Bonds, MBB, purchases, has been for the benefit of investors more than for the benefit of anyone else.

For the record, I relate that the economic paradigm known as Liberalism was one of investment choice, as well as clientelism, and was centered around the US Federal Reserve monetary policy of credit liquidity, which created a historic credit bubble, AGG, which provided a moral hazard based prosperity, and was facilitated by financial system intervention in QE, the pursuit of ZIRP, the securitization of credit such US Treasury Notes, TLT, which funded entitlements of all types, such as social security disability.


On Wednesday June 12, 2013, the Interest Rate on the US Ten Year Note, ^TNX, traded higher to 2.23%, pushing the 10 Year US Government Bond, TLT, down below support. Both Junk Bonds, JNK, and Aggregate Credit, AGG, traded strongly lower again.


Bloomberg reports Individuals pull most money from bond mutual funds since 2008. Investors pulled $10.9 billion from U.S. bond mutual funds in the past week, the biggest redemption since October 2008. The Google Finance Chart of Aggregate Credit, AGG, and Emerging Market Bonds, EMB, shows that since May 1, 2013, Aggregate Credit has fallen strongly losing 3%, and that the Emerging Market Bonds have fallen even more strongly losing 9%. Taken together, the Bloomberg report and the Google Finance Chart communicate the failure of credit, specifically the loss of trust in the monetary policies of the world central banks to stimulate global growth and trade, as well as trust in the debtor to repay the lender. Humanity is passing through an epic economic and political point in time.


The death of Liberalism’s credit and currencies is seen in the Google Finance Chart of Aggregate Credit, AGG, together with the Indian Rupe, ICN, the Brazilian Real, BZF, the Australian Dollar, FXA, and the Emerging Market Currencies, CEW. The death of Liberalism’s money, that is wealth, is seen in the Google Finance Chart of World Stocks, VT, India, INP, Brazil, EWZ, and Australia, EWA. Debt deflation, that is currency deflation, has finally come of age, through the failure of the world central bank policies of Global ZIRP and ongoing debt monetization, with the result that Liberalism’s Milton Friedman Free To Choose floating currency banker regime no longer provides seigniorage, that is moneyness, of investment choice. Now, Authoritarianism’s diktat beast regime is starting to provide seigniorage of diktat. Jesus Christ is at the helm of the economy of God, Ephesians, 1:10, terminating the fiat money system and introducing the diktat money system.

Look for the retail sales figures you show to plummet once again.