Fed QE Only Covers Federal Overspending

New Study Suggests Fed's QE Policy 'Stimulus' Is Virtually Nonexistent

For four years now, we've heard policymakers and pundits alike defend the Federal Reserve's quantitative easing based on the idea that, without it, the nation's economy would have imploded. Now, a new study from the Fed itself suggests that's not the case.

The study, by San Francisco Federal Reserve economist Vasco Curdia and New York Fed economist Andrea Ferrero, suggests that quantitative easing (QE) has done little to boost the economy's trajectory.

"Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation," the economists wrote in a special research note that was released last week.

In their study, Curdia and Ferrero looked specifically at the impact of the Fed's QE2 program, which totaled $600 billion.

Assuming the $600 billion program lasts for five years — with the Fed buying bonds the first year, holding them for two, then selling them off for the remaining two — the spending turns out largely to have been a waste.

That level of QE stimulus, even when coupled with the Fed's promise to hold interest rates at zero, likely boosted GDP by a mere 0.13 percentage point, the study found. It added just 0.03 percentage point to inflation.

Bottom line: $600 billion in QE2 spending boosted GDP by less than $200 billion. Not a very good deal. And even that minor amount of growth was due in large part to the Fed's explicit vow to hold official interest rates at close to 0% until the unemployment rate reaches 6.5% or lower, Curdia and Ferrero said.

Take away that promise, and QE2 added just 0.04 percentage point to GDP and 0.02 percentage point to inflation. In short, quantitative easing was, from the standpoint of the economy, a non-event.

Nor is this the first study by serious economists to question it. A study earlier this year by economists David Greenlaw, James D. Hamilton, Peter Hooper and Frederic S. Mishkin of the University of Chicago warned that if the financial markets melt down over the U.S. government's failure to control its surging debt, the Fed might find itself trapped by its QE policy.

"A fiscal risk shock occurring in the next five years," the economists wrote in February, "would complicate matters greatly for a Fed that will be in the process of exiting from its massive balance sheet expansion."

With $17 trillion in total U.S. debt — an amount that's now growing at a rate of $1 trillion a year — the authors argue that the Fed is essentially trapped into printing money through QE.

If QE — which now pushes $85 billion a month into U.S. Treasury and agency debt — stops, interest rates will soar, dragging the economy down.

Fed Chairman Ben Bernanke has been sanguine about this, suggesting this enormous pile of debt can all be sold off with little disruption.

We're not so sure. Once the Fed begins selling off its massive $3.6 trillion in assets acquired under the QE program (see chart), it will send interest rates surging and tank the economy.

Even more troubling is what it says about current politics.

The White House and a Democrat-led Senate have boosted spending dramatically — outlays as a share of GDP rose initially by 25% under President Obama.

The Fed, by buying up much of the newly issued federal debt, has become the No. 1 enabler of a spendthrift government that's pushing us to the brink of fiscal disaster.

At $85 billion a month, QE2 spending is roughly equal to the amount of federal debt we add each month.  It that a coincidence? No.

Source: Investor's Business Daily Posted 08/19/2013 07:11 PM ET http://news.investors.com/ibd-editorials/081913-668074-fed-stimulus-from-quantitative-easing-is-virtually-zero.htm#ixzz2cVRKXHW6 

Comments:

Repealing the Federal Reserve Act is as good as passing a balanced budget amendment and there is a good case to do just that.  The IRS and Federal Income Tax would end as well.  The next step is to reduce the footprint of the federal government to make it comply with the Constitution (as written).  Finally, we need to quit the UN.

Norb Leahy, Dunwoody GA Tea Party Leader