(Photo: REUTERS / Jonathan Ernst)
Federal Reserve Bank of New York CEO William Dudley believes QE3 remains a viable option to "provide greater stimulus" to the economy
Dow down. Gold down. The biggest money-printing push in world history... and this is how the markets react? With a yawn!
What does it mean? That QE3 will do nothing? Or that the market had already priced it in?
We don't know... probably a bit of both. But QE is the easiest way out of the mess we're in... so we figure ol' Bennie boy will keep at it.
The former Secretary of the US Treasury, along with others, has written to the Wall Street Journal to let Americans know what a "mess we're in".
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing-the purchase of government debt, mortgage-backed securities, etc.-the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give-not lend-to banks?
What the...? Yes, the Fed - in order to lend money to the US government - gives money to the zombie banks, which they hold as reserves at the Fed. Then the Fed pays them interest on this money! Nice work if you can get it. But Schultz et al continue:
The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.
This is all bad enough, but where we are headed is even worse.
President Obama's budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.
Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.
The mess has another dimension that George Schultz didn't mention. While the zombies - the banks, the regulators, the "green" training programme chisellers, 'disabled' layabouts, et al - consume more and more of the economy's resources, the productive sector ends up with less. Less money for real investment. Less money for real salaries. Less money for real economic growth.
The result? Just what you'd expect. The typical American has become poorer. Again, the Wall Street Journal tells the tale:
The income of the typical U.S. family has fallen to levels last seen in 1995, a long and pernicious slide that likely means it will be a generation before Americans regain the peak income levels reached at the close of the '90s.A report from the Census Bureau Wednesday said annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.
Median annual household income-the figure at which half are above and half below-now stands 8.9% below its all-time peak of $54,932 in 1999, at the end of the 1990s economic expansion.
According to Pew Research, the typical middle class family had a net worth of $152,000 before the crisis. Now, its net worth is only $93,000... back to a level not seen since 1992 - 20 years ago.
So, we have a poorer population that is now faced with the grim truth that it must reduce its standard of living further in order to avoid a total crack-up.
And here comes 'ol Larry Summers with more bad advice, this time for Britain:
"Britain risks a lost decade unless it changes course," he warns in the Financial Times.
As you can see from the above figures, Americans have already lost two decades - thanks in part to Summers' advice. He was Secretary of the Treasury until 2001, that is during the first big bubble. Then, he became head of Obama's National Economic Council. What he doesn't know about messing up an economy isn't worth knowing.
Summers believes that what matters is 'growth' and that you get 'growth' by stimulating demand.
There's an easy way to stimulate demand; just cut taxes. But we're pretty sure Mr Summers would be opposed. He's a meddler. He wants government to play a larger role in the economy, so that meddlers like him will have more control over it.
That's the real reason the economy has not shucked off the Great Correction already; too many people like Mr Summers - that is, the zombie elite - want to take advantage of it. "Never let a good crisis go to waste," they say. They use the financial crisis - that they helped create - to consolidate power and keep the money flowing to their supporters, the zombies.
Are we over-simplifying? Nope. Don't think so. Here's our old friend Marc Faber on the subject:
"If we have an economic crisis in the western world it's because the government makes up 50 percent or more of the economy."
If you really wanted to stimulate the economy in a meaningful way, you'd cut taxes. That would put money in people's pockets. They'd invest... spend... they'd do what they wanted with it.
Trouble is, half the people don't pay taxes. And, as George Schultz points out, more than a third of all taxes are paid by just 1% of the population - the rich.
So you see, the situation is already so corrupt - with a majority of the voters enjoying benefits that they don't pay for - there is little chance of genuine reform.
But let's imagine that you could get away with it. Let's imagine that you wanted to 'stimulate' real growth. What would you do?
Simple, you cut out the zombies. They don't produce wealth. They absorb and consume resources. They use up prosperity.
How would you cut them out? Simple, cut taxes... and cut spending. Half the national security budget could go. That alone would save $500bn. And cut another half a billion out of domestic spending.
Presto. That gives you a federal budget that is balanced. And that saves $1trn worth of resources - now going to the zombies - that can be saved and invested in the real economy, used to pay real salaries, and available for real spending.
Would this cause 'growth' immediately? Nah... it would take a while... and in the meantime the zombies would bitch and moan... and probably come after you with a rope in their hands.
for The Daily Reckoning Australia
The article was first published by The Daily Reckoning Australia