Quantitative Easing - No Losers?

How well did the Fed's stimulus work? A look back at Fed's QE: Critics warned of disaster, but most economists say program worked

Excerpt:

Soaring inflation. A collapsing dollar. Bubbles in financial markets that would soon pop. One presidential candidate even suggested that the Federal Reserve chairman should be roughed up. Over the past five years, as the Fed has pumped ever-more money into the financial system, critics have warned that it would lead to all kinds of disasters. Yet the central bank kept extending its bond-buying program, known by the wonky name of quantitative easing, or QE. It was an unprecedented effort aimed at lowering borrowing costs, encouraging spending and reviving a dormant economy before it could slip back into recession. Now, $4 trillion later, QE is drawing to a close, so the question is: Did it work? Economists have plenty of quibbles, but many agree that the Fed accomplished the bulk of its goals. ... Here's what has actually happened since Bernanke made the case for the Fed's expanded effort in August 2010:

• The unemployment rate has fallen to 5.9 percent, the lowest level since July 2008. Back in August 2010, it was 9.6 percent.
• The stock market has soared. The Standard & Poor's 500 index has returned 101 percent, powered by a stronger economy, higher spending and record corporate profits.
• The dollar has held up against most major currencies. One widely used measure, the dollar index, is 3 percent higher.
• Inflation has remained tame, despite all the warnings. Over the past year, overall prices have climbed a modest 1.7 percent, still below the 2 percent annual increase that the Fed targets.

Comment: For another article that addresses QE and the stock market see this link. Here's my take and the winners:

• The investor and
• Most of them are the wealthy

On the losers:

• Frankly I was a naysayer on Quantitative Easying.
• My hypothesis is that the middle class and the lower class are the QE losers. You cannot just pump that much $$ into the system without some negative consequences. Because it has not been observed yet does not mean it will not occur. 

Bernanke’s Reverse Robin Hood

Bernanke’s Easy Money Moves: The Crucial Reality
Excerpt:

Federal Reserve Chairman Ben Bernanke has not kept short-term interest rates at record lows for the past four years just so companies with no need for cash can borrow great sums of it for next to nothing.

So it was understandable, and even predictable, that this week's move by Amazon.com (AMZN) to issue $3 billion worth of bonds due in three, five and ten years at trivial rates scaling from 0.65% to 2.5% would be greeted with complaints about the misapplication of monetary succor.

Here, after all, is a company so dominant and capital rich that, only 18 years after its founding, it can borrow billions at less than one percentage point more than the United States Treasury does — while retirees and other blameless paragons of thrift are deprived of safe income from their savings by the Fed's anchoring of rates near zero.

Comment: Of course it is also easy to borrow at record low interest rates to buy a home too!

QE = "Sugar High"

Romney Calls Fed Move ‘Sugar High’

Excerpts:

Republican presidential candidate Mitt Romney, in his most explicit criticism of the Federal Reserve’s recent moves, on Friday said the central bank was offering the economy nothing more than a “sugar high” that would cause pain for everyone from savers to the U.S. dollar down the road.

... “Recognize that as the Federal Reserve keeps on trying to stimulate the economy by printing more money that there’s a cost to that,” Mr. Romney said. “The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down and the risk for long-term inflation goes up. There’s real cost to these stimulative print-more-money policies. The real course ahead for America is to encourage the growth of our economy not just to go out there and print more money.”

Comment: Did  you ever do this when you were a kid? Pop a sugar cube in your mouth. If so you understand the analogy.

For every action there is an equal and opposite reaction

Egan-Jones downgrades U.S. rating on QE3 move

 Excerpt:

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed's new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed's plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities. "From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%," Egan-Jones said in a note. "In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%."

Comment: Your money is worth less today than yesterday. Gold however went up!

QE: "Take printer out of box with the out tray facing the window ...."

Comment: John Clarke official site

PUMP! PUMP! PUMP!

Comment: End of Day image capture of QE3 & Stock prices. The previous post has a snap shot taken earlier today.

QE3 and stock prices

What is QE? Quantitative easing

Excerpt:

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value

Comment: I'm not convinced it is good policy! Here's a view that it is bad policy: How Quantitative Easing Helps the Rich and Soaks the Rest of Us

Understanding Quantitative Easing

What Happens When QE2 Ends?


Excerpt:

But now that the central bank's bond-buying binge is drawing to a close, even some of the Fed's toughest critics are nervous. The program—which policy wonks call quantitative easing, but nearly everyone else calls QE2—was designed to keep bond prices high and interest rates low. It is credited with propping up the economy and, in turn, boosting the stock market. Technically, the Fed is in the midst of its second round of bond buying—hence the 2—since the financial crisis struck in 2008. When the first round ended in spring 2010, both stocks and bonds tumbled

Read more: What Happens When the Fed's QE2 Ends? - SmartMoney.com http://www.smartmoney.com/investing/economy/what-happens-when-the-feds-qe2-ends-1303326131374/#ixzz1KCImSTZ3

Comment: I still find it confusing!

Quantitative Easing Explained

Is the Federal Reserve Destroying the Dollar?

Excerpt:

It is hard to accept that the head of the Chicago Federal Reserve Bank, or any other Federal Reserve Bank president, or Ben Bernanke, the head of the whole system, believes that by driving long-term interest rates lower than they already are (thirty-year U.S. Treasury Note near 4%), one can convince anyone, much less one half of Americans who did not go broke, to want to borrow enough money to accelerate this economy. It is a preposterous concept.

The most probable outcome will be to ignite inflation. The U.S. dollar is the top reserve currency in the world primarily because of its reliability for maintaining its value. When the Fed, the fiduciary custodian of the world's current top reserve currency, tells all the holders of the dollar that they are going to deliberately depreciate it at 2% to 4% a year, a whole lot of people are going to be listening very closely. It is a little like yelling "fire" in a movie theatre. You want to be first to get out of the door.

If you are holding a ten-year U.S. Treasury Note yielding 2% and the Fed assures you that inflation is going to increase by 2%, you have a potential problem. Any prospective buyer of your Treasury will want to make at least 4% to compensate him for the new inflation. Thus, he will not want to pay you as much for your ten-year U.S. Treasury Note as you paid for it. When you paid $1,000 for your ten-year U.S. Treasury Note, you got it with a 2% interest payment. Because your new buyer requires at least a 4% interest payment, he will pay you only $833 for your $1,000 bond. You will lose $167, or 16.7% on the transaction. If inflation increases by 4%, your bond will be worth only $696, and your loss will be $304, or 30.4%.

But the Fed cannot control everybody's reaction to their hoped-for 2% increase in inflation. What they are expecting to do is very imprecise. People's expectations about inflation may run ahead of actual inflation, with the result being that inflation becomes self-propelling. Commodities' futures go up immediately to anticipate future inflation. These future prices drive up current costs of raw materials, retailers pass it along quickly, and employees want wage increases, and thus, the dollar declines in value.

Comment: I'm trying to stay hopeful but I'm skeptical about the Fed's moves