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December 19, 2013

Has Quantitative Easing Been Successful?

Two Economic Charts Say No

With the Federal Reserve finally moving to taper their counterfeiting efforts, Keynesians are coming out of the woodwork to laud the successes of quantitative easing. The financial system was saved from collapse, the employment picture is improving, and consumption is healthy again according to the monetarists. But if they bother to look at their own data, the pictures do not fit the story. First, let's look at employment.

As you can see, the civilian participation rate has continued steadily lower since the financial crisis. So how can the Census Bureau tell us the umemployment rate is declining? Well, these people are simply no longer actively seeking employment and thereby are removed from the denominator. A 300 basis point drop in labor participation is hardly a sign of success, short of postulating that the decline would have been much steeper without QE.

The second chart is just as damning, as we can see that the year-over-year change in personal consumption is now dragging at crisis levels.

This chart excludes food and energy, so a big part of the decline in non-food and non-energy consumption was likely induced by the rising prices of food and energy. People were forced to curtail consumer purchases as more money was soaked up by food and energy expenses.

The collapse in consumption in 2008-09 was associated with a collapse in stock prices, as stocks lead consumption lower. This time, consumption is leading, and while we have yet to see any deleterious results in equity prices, once the effects of tapering kick in next month, I believe the result will become quickly obvious.

As for rescuing the banking system, my view has always been the same: the banks were not rescued, but rather the politically-connected. The proper way to solve the financial crisis would have been to back all deposits... no matter the size... and let the debt holders fry. Deposits would have then found their way to healthy banks, allowing for an immediate economic expansion since those banks' balance sheets would have been robust with new deposits.

Instead, we nursed a deathly sick system by transferring the effects malfeasant behavior onto taxpayers. And this results was ultimately the true aim and effect of quantitative easing: to protect the status quo. Unfortunately, the failure to allow market-clearing activity will ultimately result in larger crisis. Has QE been successful? Equity and art investors may say yes, but the true effects of these policies have yet to play out.


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