Over the past five years the U.S. central bank, the Federal Reserve (Fed), has printed nearly $4 trillion in liquidity (money) which it has provided to banks and professional investors. This is called ‘Quantitative Easing’ (QE). QE means the Fed essentially prints money and buys bonds—mostly toxic subprime mortgages to date—from institutional investors (i.e. banks, shadow banks, foreign banks, other investors).
In addition to printing nearly $4 trillion with which to buy bonds from banks and investors, since 2008 the Fed has also conducted various ‘special auctions’, by which it has loaned additional trillions of dollars at little or no interest to banks. Still more trillions were loaned were loaned by the Fed by means of policies that resulted in near zero interest rates (between 0.1%-0.25%) at which banks could borrow money.
The Fed’s QE purchases represent a massive direct subsidization of banks and investors, since the Fed’s bond purchases were almost certainly bought in most cases at prices well above the collapsed value of the bonds—most of which were mortgage bonds including toxic subprime mortgages. But we’ll never know the exact price the Fed paid bankers and investors for the bonds, since the Fed doesn’t provide specific reports on individual deals and purchases; not even to Congress. Only the aggregate data is reported.
The total of QE, special auctions, and near zero interest rates made available to bankers and investors since 2008 comes to at least $10 to $15 trillion. Some estimates range as high as $20 trillion. The number rises still higher when similar QE and free money measures by foreign central banks is taken into account; specifically, by other major central banks like the Bank of England, Bank of Japan, and the European Central Bank (ECB).
Justifying QE: Economic Recovery
The Fed originally argued in 2009 that this massive, free money injection and bank subsidization was necessary to stimulate the U.S. economy and generate a sustained full recovery as quickly as possible. But even if the Fed and its policies were responsible for all the economic growth since 2009, an impossible assumption that ignores all other contributions to growth, that contribution would still amount to only 8.2% GDP growth over the past five years—which is about only half the GDP growth after five years that occurred in prior recession recoveries since the 1970s.
The Fed’s QE policies these past five years have come in four doses. There was the initial QE1 in 2009, amounting to $1.75 trillion in bond purchases. The U.S. economy then stalled out in the summer of 2010. Then came the $600 billion QE2 in the fall of 2010. The economy stalled a second time in 2011, leading to what was called ‘Operation Twist’ (QE 2.5?) that provided another $400 billion in mortgage bond purchases. When that petered out, it was followed by QE3 last September 2012. Unlike its predecessors, QE3 has had no limit. It calls for Fed purchases of $85 billion a month for ‘as long as necessary’. So QE3 has now amounted to about another $1 trillion, and continues to rise by $85 billion every month.
While there is talk that the Fed may start to ‘taper’ (reduce) its $85 billion a month, don’t expect much of a change. Maybe $10 billion a month or so reduction. QE will therefore continue for some time. That’s because, as this writer has argued elsewhere, bankers and big investors are now ‘addicted to the free money’ regime that characterizes 21st century finance capital globally today.
Just the mention of a possible ending of QE by the Fed this past June sent bankers-investors globally into financial fits and paroxysms last June. Stocks, bonds and other financial assets fell into a major tailspin in a matter of weeks. The Fed quickly denied it had any such intention of ending QE. The markets quickly recovered and went on their merry financial bubble way once again. That event of possibly reducing QE, and financial markets’ extreme reaction, this past summer has been called the ‘taper tantrum’. What’s coming in the next few weeks, however, is at most a ‘taper tweak’.
Justifying QE2: Restoring Price Stability
The Fed initially launched QE1 in early 2009, claiming it would stimulate the economy and generate a recovery. But no such thing happened. In the summer of 2010 the economy weakened again. The Fed thereafter switched its excuse. It next argued in 2010 a second QE was necessary, this time to head off the growing trend in the economy toward deflation (price declines) at the time.
Deflation is a very dangerous thing. As long as prices continue to fall, businesses will hold off investing and consumer households from buying. For businesses, deflation creates uncertainty whether they can sell their goods at a price high enough in the future to cover their production costs in the present. For households, deflation results in consumers ‘waiting for prices to bottom out’ before actually purchasing again. The recent housing market in the U.S. is a good example. Home prices continued to fall for four years, about 40% on average. During the period of home price declines the housing market did not recover, despite the 30%-40% price drops. It wasn’t until late 2012, as home prices began to rise, that home buying recovered a little and home prices began rising a little, by about 12-15%. Thus deflation means both business investment and household consumption ‘freeze up’. That means no recovery. The Fed therefore argued another round of QE was needed to halt deflation and get prices rising again, so that investment, consumption, and recovery could follow.
But the Fed’s claim that QE 2 was needed to prevent deflation and raise prices (to a Fed target of 2.5%), as a way to encourage investment and consumer spending, didn’t materialize either. Between 2010-2011, the period during which QE2 was in effect, consumer and wholesale prices for goods and services continued to slowly drift lower, flirting dangerously with deflation. While QE policies may—and often do—result in price bubbles for financial assets (stocks, bonds, etc.), they have little effect in terms of inflating prices for normal goods and services.
So the Fed’s QE1 did not generate a sustained recovery for the U.S. economy (which has been bouncing along the bottom now for four years since the ‘end’ of the recession in June 2009). And its QE2 did not result in getting prices to rise to the Fed’s minimal target of 2.5%. The primary goals of QE in its first and second iteration therefore failed.
Justifying QE3: Reducing Unemployment & Creating Jobs
Enter QE3, and the Fed’s third justification for introducing yet another round of QE3 in the fall of 2012. The new excuse was that another QE was necessary in order to reduce unemployment rates and get a job recovery underway. In September 2012 the Fed announced it would launch another QE, printing and injecting $85 billion a month into the economy, until such time as the ‘U-3’ unemployment rate fell—from the 8.1% level in September 2012 to a 6.5% target level. The U-3 rate has come down over the past year to 7.3%. Meanwhile, the more accurate U-6 unemployment rate still remains around 14% and more than 20 million continue unemployed.
But the Fed’s QE3 has not really been responsible for reducing even the unemployment rate from 8.1% to 7.3%. That reduction has been the result of millions of unemployed leaving the labor force altogether over the past year, and from jobs ‘churning’ from declined in full time jobs to increases in part time and temporary agency advertised jobs in the past year.
Over the past year, 2012-2013, it is true that the U.S. economy has created 2.3 million jobs. But this has been largely part time and temp jobs, with low pay and essentially no benefits.
‘Jobs Churn’: The U.S. Jobs Market Today
The main characteristic of the U.S. job market today is perhaps best described as a ‘job churn’. While the U.S. is not losing jobs, it is not creating them very well—at least not decent paying jobs.
The U.S. is ‘churning out’ full time jobs and replacing them with ‘contingent jobs’. Since January 2013 through July 2013, just under a million jobs were created; but no fewer than 650,000 of these were part time and temp jobs. Meanwhile, 250,000 full time jobs disappeared over the same period. This ‘job churn’ has other dimensions as well.
In addition to replacing full time with part time-temp jobs, the U.S is providing jobs for millions of new entrants (at mostly part time-temp status) as millions more leave the labor force altogether.
It is substituting high paid jobs for low paid. As a recent study showed, 60% of the jobs lost since 2008 have been ‘high paid’ (more than $18/hr. on average), while 58% of the jobs created since 2008 have been ‘low paid’ (less than $12 an hour).
Not only is the U.S substituting new entrants to the labor force for those leaving the labor force; not only full time for part-time/temp jobs; not only high paid for low paid. The economy is churning out union jobs and replacing them with non-union jobs as well.
It is a sad but remarkable fact that while the economy added a couple million jobs since 2012, U.S. unions experienced an unprecedented decline of 500,000 jobs in 2012 alone. That loss amidst job creation has never before occurred for organized labor. At that rate, its meager 6% or so unionization rate in the private sector today will fall to 3% or less by the end of the current decade—i.e. the lowest ever, signifying the virtual disappearance of organized labor in the private sector in America for all practical purposes.
QE as 21st Century ‘Trickle Down’
Notwithstanding the foregoing facts, if one still insists on maintaining that the Fed’s QE3 has reduced unemployment, it is clear that QE to date is an incredibly inefficient, costly, and wasteful way to create jobs.
For example, let’s assume QE3 and Fed monetary policy is responsible for half of all the 2.3 million jobs created over the past year—a generous assumption. But let’s assume it nonetheless. That’s 1,150,000 of the roughly 2.3 million jobs created over the past 12 months. Let’s further assume that about 400,000 of that 1,150,000 represents part time-temp jobs. Next, if two part time jobs roughly equals one full time job, that’s 200,000 full time equivalent jobs created by QE and the Fed the past 12 months. Add that 200,000 to the remaining 715,000 full time jobs assumed created by QE3 over the past year, adds up to a total of 915,000 full time jobs created by QE/Fed over the past year. Let’s round it all up, to an even 1 million jobs created by QE3.
Now let’s take the $1 trillion cost of QE3 over the past year. Divide the $1 trillion by 1 million jobs and the result is a cost of $1 million per job created. That’s an absurdly inefficient and wasteful job creation program!
So who has really benefited from the Fed’s $1 trillion QE job creation program?
Taking the calculations one further step, the average wage of the 1 million jobs is reasonably no more than $15/hr—given the composition of 400,000 part time-temp, low paid jobs in the total. That $15/hr. is about $30,000 a year. The ‘benefits cost’ load is no more than 10% of the base pay, since many of the jobs are part time-temp with essentially no benefits. That’s another $3,000. That’s $33,000. That leaves $967,000 of QE3’s Fed printed money going into the pockets of someone else other than the worker who got the QE created job!
The ‘someone else’ in this case include the bankers and investors to whom the $1 trillion was provided in the first place. The bankers and investors then mostly loaned out the QE mostly to other speculators, who in turn likely invested it in the stock, bond and derivatives markets—thereby driving up the financial asset prices for these securities which, when sold, realize super-capital income gains. Given the absurdly low capital gains tax rates that exist, the bankers-investors get to keep 85% or more of their profits (realized income). Alternatively, they might not loan out the $967,000 billion from the Fed QE windfall to other financial market speculators, but loan it to offshore emerging markets, like China. In either case, the $967,000 billion doesn’t create any jobs in the U.S. since it doesn’t result in investment in the U.S. Or, thirdly, they might just hoard the cash; or send it to their offshore tax havens in order even to avoid paying the nominal capital gains tax; or, if they’re a public corporation, as most banks are, use it to buy back their bank stock, payout more dividends to shareholders, or use it to purchase their competitors (mergers & acquisitions). None of that creates jobs either.
The net outcome of QE is the escalating incomes of bankers, investors, wealthy shareholders and high net worth individual households. That means even more income inequality in the U.S..
It is not coincidental that during the period of QE1-QE3 in the U.S., income inequality has accelerated at an even faster pace than in the past. As the most recent data on income inequality trends, released by Professor Emmanual Saez of the University of California earlier this month as part of his on-going study of income inequality trends, shows: the wealthiest 1% households accrued 95% of all the income gains in the U.S. economy between 2009-2012.
QEs mean bankers and investors get $967,000 and the worker gets $33,000. That’s the essence of the Fed’s current QE3 job creation/unemployment rate reduction claims!
If one were to assume this ratio represents ‘trickle down’ economics in practice today, it would mean that for every one dollar in income for the worker, the capitalist-investor-banker is now getting 29.3. Of course, that 29.3 invested in financial securities generates even more income over time. The ‘trickle down’ ratio rises further and is virtually unlimited to the upside for the wealthy investors who benefit enormously from the free money QE policies of the Fed—while workers struggle to make ends meet working increasingly part time and temp jobs with low pay and no benefits.
A ‘QE for Jobs’ Program Alternative
It doesn’t take much imagination to envision a better, more efficient, less wasteful way to create jobs. If the Obama administration had a 21st century Works Progress Administration direct job creation program, it could have the Fed print the $1 trillion QE3 and create 20 million jobs at a fully loaded full time $50,000 a year. That would instantly wipe out every U-6 jobless person in the U.S.. That’s 20 million jobs at $50k vs. the Fed’s current ‘unemployment reduction program’ of 1 million jobs at $33k.
Why should the Fed print money and subsidize the incomes of super-wealthy investors and their banks? Why shouldn’t the Fed use its printing press to instantly finance the creation of 20 million jobs directly by the U.S. government? That’s a jobs program that would add nothing to the U.S. deficit and debt, just as the Fed’s QE programs have added nothing to the U.S. deficit and debt.
Those who argue to do so would result in a major inflation are simply ignoring the facts. Nearly $4 trillion in QEs to date have had no effect on inflation in goods and services. They have only inflated financial securities prices. Inflation in real goods and services continues to drift lower, flirting with bona fide deflation. If the Fed wants the get goods and services inflation to rise to 2.5%, a QE for Jobs program noted above would likely do it.
Others might argue that a $1 trillion ‘QE for Jobs’ program would mean the Fed would have to print $1 trillion every year to keep paying for the jobs in subsequent years. But that’s nonsense. It doesn’t take much imagination to understand that $1 trillion in jobs-related income in the hands of 20 million workers would result in a major boost to consumption. That in turn would result in businesses finally investing in the U.S. and creating jobs to match the consumption demand. As real investment rose, the Fed ‘QE for Jobs’ might actually be scaled back in magnitude.
A ‘QE for Jobs’ program would also represent the greatest reduction in income inequality overnight in U.S. history. It would also mean an annual first year boost to consumption of at least $500 billion. Considering possible ‘multiplier effects’, that would mean a boost to U.S. GDP of more than $1 trillion. That would in turn easily push the U.S. economic recovery to an annual GDP growth rate of more than 7% to 8%–and result in the fastest (not currently slowest) economic recovery on record for the U.S.
~ Jack Rasmus serves as the Chairman of the Federal Reserve System in the Economy Branch of the Green Shadow Cabinet of the United States