Several weeks ago, the Federal Reserve decided not to cut back, or taper as the finance mavens say, the billion-dollar bond buying program known as quantitative easing, which is a euphemism for printing money. A gradual reduction of QE had been expected since June, when Fed chairman Ben Bernanke said the economy was getting stronger and he might reduce the monthly purchases by the end of the year.
But the Fed got cold feet and changed its mind because its leaders don’t believe that economic activity and labor market conditions are strong enough to merit reducing the bond purchases. Economic growth is lackluster. The unemployment rate is too high, labor force participation is at a 34-year low and too many newly created jobs are low paying and/or part time. Consequently the Fed will continue buying $85 billion of Treasury and mortgage bonds each month and remain committed to holding short-term rates near zero at least so long as the unemployment rate remains above 6.5 percent.
So the training wheels stay on the bicycle and continue to feed an addiction to cheap money.
After five years of depending on a monthly injection of liquidity, it may well be that QE will become a permanent tool of the Fed for managing the business cycle and garden-variety recessions. Since it began in the Paleozoic era, circa late 2008, the Fed has hoped that QE would stimulate economic growth and hiring by holding down interest rates and encouraging households and businesses to spend and invest.
But given that the wealthy own a disproportionate amount of equities, the stock market’s gains are unequally distributed. While a rising stock market may make people feel wealthier, the run-up in their pension accounts -thanks to the stock market reaching new highs – does not send the average American running to the nearest retail store.
Corporations are using the record-low interest rates to take on new debt for acquisitions, increase dividends, and engage in share buybacks rather than investing in the real economy, which has certainly not helped the labor market. Of course, thanks to the Fed, the interest rate paid on the national debt is at a historic low of2.4 percent, according to the Congressional Budget Office. This keeps debt service costs down and understates the budget deficit.
The danger is that as everyone becomes addicted to cheap money, the Fed’s moves are setting the stage for a new bubble. Printing money floods the market with more dollars, which makes dollars worth less, which means that tangible assets priced in dollars, such as oil and food, end up costing more.
Prolonged low interest rates and an abundant money supply have punished savers and retirees. Their money has generated little return, which forces them into high-risk investments to try and keep up with inflation. The younger generation hurt by high unemployment is not increasing its consumption to make up for the decline in spending among older Americans. And as middle America struggles with rising food and gas prices, weighed down by high unemployment and stagnant wages, the gap between the wealthy and everyone else is growing.
While the question of whether the Fed’s monetary policy has helped the real economy and the average American remains unanswered, a new study from the University of California at Berkeley finds that the top 1 percent have captured 95 percent of the gains during the so-called recovery. Additionally, according to the Census Bureau, middle-class incomes have largely remained stagnant even after the recession ended. With high unemployment, corporations are under no pressure to increase workers’ mcomes.
The gap between the top 1 percent and the rest of the country is the greatest it has been since the 1920s. A large reason for this growing disparity is that the wealthiest households have benefited far more that ordinary Americans have from the Dow Jones Industrial Average more than doubling in value since it bottomed out in early 2009.
So much for the presumption that once the Great Recession ended, the American consumer would once again fuel economic growth.
originally published: October 5, 2013