This research note from Goldman’s Jan Hatzius has been making the rounds. In it he provides the three reasons why he believes QE3 is still on the table. He says:
“1. The improvement might not last.
With real GDP growth tracking just 2% in the first quarter and signs that at least some of the recent strength is probably due to the unusual warm weather and perhaps some seasonal adjustment distortions, question marks still surround the true pace of activity growth. In addition, there are still several actual or potential "headwinds" for growth, including a reduced boost from inventory accumulation, the recent increase in oil and gasoline prices, continued risks from the crisis in Europe, and the specter of fiscal retrenchment after the presidential election.
2. Even if the improvement does last, faster growth would be desirable to push down the unemployment rate more quickly.
Fed officials believe that the level of economic activity and employment is still far below potential. This means a large number of individuals are involuntarily unemployed, which not only causes hardship in the near term but may also translate into higher structural unemployment in the long term"¦This creates an incentive to find policies that speed up the return to full employment.
3. Not easing might be equivalent to tightening.
At a minimum, the bond market currently discounts some probability of QE3. This has kept financial conditions easier than they otherwise would have been, which has presumably supported economic activity. A decision not to ratify expectations of QE3 could therefore result in a tightening of financial conditions.”
Source: Goldman Sachs
Addicted to QE. That’s all. The only game in town. I don’t know how this could end well. If someone has a more optimistic insight let me know but for me until all our nations are owned by a cartel of bankrupt banks it’s darkness for all.
It does not have to end. Japan has been doing QE for 20 years. But Japan has had a long slow market decline over that time. Now, their demographics are different from the USA, and that should make some difference.
I’ve the suspect that most MMTers do not consider the commercial deficit problem enough. Japan is in deep crisis BUT up to a few months ago with a strong commercial surplus. In a floating currency regime this means a strong currency, that is cheap imports (energy & food). Furthermore the population is aging. For the US, demography is not an issue now but the country is extremely fragile to external price shocks. For almost 30 years there were no investments (the electrical grid is one of the worst in the west, just to name one). I believe a strong inflation for the US is much more probable than the common view.
The Fed just can’t resist spinning the dials and pulling the levers. It’s hubris, and reflects the broader trend towards Federal takeover, and involvement in everything.
Jan is exactly right in his analysis; they will most likely execute QE3 for the reasons he states, but it will end up causing far more damage in the long run.
Jan made precisely this argument in 2003-2004 with regards to Greenspan’s easy money policy – that “Fed action” was necessary to avoid a bad outcome. And we did avoid a “bad outcome” for several years, and then as a direct result of Greenscam’s policies we ended up with the housing bubble, sub prime crisis and collapse of 2008/9.
http://globaleconomicanalysis.blogspot.co.uk/2012/03/james-grant-says-bond-market-is-bubble.html
Instead of using the unemployment rate, which is very distorted this year because of the huge (2+ million a month) swings, which in turn is because of the once-in-a-decade census, we should look at the employment-to-population ratio. That metric also skips past the millions who left the workforce(most of whom are young, not older than 55 if you look at the actual data. Retiring baby boomers are actually a minority. About 25-30 % of the several millions who jumped out).
And the employment-to-population ratio for 25-54 year olds(to avoid the noise in the data by using the wider 16-54 metric which counts college students etc) has barely budged.
And this, we should remember, is despite $1 trillion dollar deficits for 4 years running(and odds are fairly high that 2013 will be another one), record low rates and tax breaks so low that they are unsustainable for the longer-term budget picture.
And then we have the fiscal cliff in 2013, with already ingested cuts into the budget as well as the possible repeal of the Bush tax cuts. Many forget that a large share of these tax cuts went to the middle classes too(even if the rich got disproportionally more). Repealing all these tax cuts will hit GDP growth(even if I think the full repeal would actually be best in the long run, in the short run it will shave off GDP growth).
There’s about 40 different taxes, big and small, who are also facing the specter of renewal or discardment. There are a lot of taxes baked into the Obamacare program which will hit in 2013. My contention isn’t that repealing the Bush tax cuts or that Obama care is somehow bad policy. My point is the timing of it all. It all hits at once.
And against this backgrop we must place rising oil prices(due to tight supply not speculation or other fairy tales), Europe’s export shock which will hit in a quarter or two, and – of course – the possible and probably Israeli airstrike against Iran which draws closer and closer.
Most of what I’ve outlined are risks, and not even half have to be materialized in order for there to be very significant effects on the budget, which in term would mean even more debt and unemployment.
I’m hoping that America will pull through, now that China is slowing down, but one thing is for sure: complacancy isn’t realistic in these waters.
I still can’t believe seemingly smart people can make the arguement for his number 2 point. Buying bonds = creates jobs??
Well what are they waiting for? Just buy all outstanding government bonds already and get the USA back to full employment!
keynesian irony anyone? keynesism is bleeding out. spurting blood like stuck pig. but because it didn’t work. but because the keynesists took it too far. abused the theories and disregarded natural laws. could be a while before we actually see the true crash, with the continued propping up. 07-09 was nothing compared to what the true crash will be. the real correction. market tried to correct itself and instead politicians, starting with Bush, exacerbated by Obama, continued to prop it up. Well you know….i’m just a conspiracy theorist…..yah……
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This research note from Goldman’s Jan Hatzius has been making the rounds. In it he provides the three reasons why he believes QE3 is still on the table. He says:
“1. The improvement might not last.
With real GDP growth tracking just 2% in the first quarter and signs that at least some of the recent strength is probably due to the unusual warm weather and perhaps some seasonal adjustment distortions, question marks still surround the true pace of activity growth. In addition, there are still several actual or potential "headwinds" for growth, including a reduced boost from inventory accumulation, the recent increase in oil and gasoline prices, continued risks from the crisis in Europe, and the specter of fiscal retrenchment after the presidential election.
2. Even if the improvement does last, faster growth would be desirable to push down the unemployment rate more quickly.
Fed officials believe that the level of economic activity and employment is still far below potential. This means a large number of individuals are involuntarily unemployed, which not only causes hardship in the near term but may also translate into higher structural unemployment in the long term"¦This creates an incentive to find policies that speed up the return to full employment.
3. Not easing might be equivalent to tightening.
At a minimum, the bond market currently discounts some probability of QE3. This has kept financial conditions easier than they otherwise would have been, which has presumably supported economic activity. A decision not to ratify expectations of QE3 could therefore result in a tightening of financial conditions.”
Source: Goldman Sachs
Addicted to QE. That’s all. The only game in town. I don’t know how this could end well. If someone has a more optimistic insight let me know but for me until all our nations are owned by a cartel of bankrupt banks it’s darkness for all.
It does not have to end. Japan has been doing QE for 20 years. But Japan has had a long slow market decline over that time. Now, their demographics are different from the USA, and that should make some difference.
I’ve the suspect that most MMTers do not consider the commercial deficit problem enough. Japan is in deep crisis BUT up to a few months ago with a strong commercial surplus. In a floating currency regime this means a strong currency, that is cheap imports (energy & food). Furthermore the population is aging. For the US, demography is not an issue now but the country is extremely fragile to external price shocks. For almost 30 years there were no investments (the electrical grid is one of the worst in the west, just to name one). I believe a strong inflation for the US is much more probable than the common view.
The Fed just can’t resist spinning the dials and pulling the levers. It’s hubris, and reflects the broader trend towards Federal takeover, and involvement in everything.
Jan is exactly right in his analysis; they will most likely execute QE3 for the reasons he states, but it will end up causing far more damage in the long run.
Jan made precisely this argument in 2003-2004 with regards to Greenspan’s easy money policy – that “Fed action” was necessary to avoid a bad outcome. And we did avoid a “bad outcome” for several years, and then as a direct result of Greenscam’s policies we ended up with the housing bubble, sub prime crisis and collapse of 2008/9.
http://globaleconomicanalysis.blogspot.co.uk/2012/03/james-grant-says-bond-market-is-bubble.html
Instead of using the unemployment rate, which is very distorted this year because of the huge (2+ million a month) swings, which in turn is because of the once-in-a-decade census, we should look at the employment-to-population ratio. That metric also skips past the millions who left the workforce(most of whom are young, not older than 55 if you look at the actual data. Retiring baby boomers are actually a minority. About 25-30 % of the several millions who jumped out).
And the employment-to-population ratio for 25-54 year olds(to avoid the noise in the data by using the wider 16-54 metric which counts college students etc) has barely budged.
And this, we should remember, is despite $1 trillion dollar deficits for 4 years running(and odds are fairly high that 2013 will be another one), record low rates and tax breaks so low that they are unsustainable for the longer-term budget picture.
And then we have the fiscal cliff in 2013, with already ingested cuts into the budget as well as the possible repeal of the Bush tax cuts. Many forget that a large share of these tax cuts went to the middle classes too(even if the rich got disproportionally more). Repealing all these tax cuts will hit GDP growth(even if I think the full repeal would actually be best in the long run, in the short run it will shave off GDP growth).
There’s about 40 different taxes, big and small, who are also facing the specter of renewal or discardment. There are a lot of taxes baked into the Obamacare program which will hit in 2013. My contention isn’t that repealing the Bush tax cuts or that Obama care is somehow bad policy. My point is the timing of it all. It all hits at once.
And against this backgrop we must place rising oil prices(due to tight supply not speculation or other fairy tales), Europe’s export shock which will hit in a quarter or two, and – of course – the possible and probably Israeli airstrike against Iran which draws closer and closer.
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