Email exchange with Warren Mosler. Please see his comments in BOLD.
From: Warren Mosler
Date: Sun, 5 Jun 2011 18:52:35 -0500
On Thu, Jun 2, 2011 at 1:44 PM, Bob Kurlander
If you have time can you comment on QE2 and this article below for Wall And Broad Report post. Everyone is worried that QE2 is ending and who cares, it didn’t create jobs, the economy is in a soft patch, and really did not do much to benefit those to whom they promised would benefit. And a QE3 would be terrible.
QE2 Failed to Boost U.S. Spending, El-Erian Says: Tom Keene (1)
By John Detrixhe and Tom Keene
June 2 (Bloomberg) — The Federal Reserveâ€™s quantitative easing policy failed to meet the â€œultimate objectiveâ€ of boosting employment and economic growth, saidMohamed El-Erian, chief executive officer at Pacific Investment Management Co.
While the bond-purchase program pushed investors into higher-yielding assets such as stocks, the â€œtransmission mechanismâ€ to lower unemployment by driving more money into the economy didnâ€™t work, El-Erian of Pimco, the worldâ€™s biggest manager of bond funds, said in a radio interview on â€œBloomberg Surveillanceâ€ withTom Keene.
NOR WAS THERE ANY POSSIBILITY IT WOULD HAVE WORKED. THERE IS NO SUCH MONETARY CHANNEL, AS CONFIRMED BY THE FED’S OWN RESEARCH PAPER BY SETH CARPENTER
â€œIf success is defined in terms of the ultimate objective, which is pushing up valuation in order for people to spend more on goods and services and therefore get the economy to grow and unemployment to come down rapidly, then the answer is no,â€ El- Erian said from Newport Beach, California.
The U.S. central bank began the second round of asset purchases, known as QE2, in November after buying $1.7 trillion in securities through last year, increasing the amount of money in circulation to prevent deflation.
IT DOESN’T INCREASE THE ‘AMOUNT OF MONEY IN CIRCULATION’ APART FROM NARROW DEFINITIONS OF ‘MONEY’ THAT ARE OF NO PRACTICAL CONSEQUENCE
The central bankâ€™s $600 billion in purchases of Treasuries are due to end this month.
â€œSimply throwing more money at the economy doesnâ€™t seem to be enough,â€ El-Erian said.
NO ‘MONEY WAS THROWN’ AT THE ECONOMY.
â€œPart of the unintended consequences is not only did we get good inflation, which is higher equity prices, higher asset prices, but we got bad inflation, which is higher commodity prices.â€
THE PRICE CHANGES WERE FROM INVESTORS AND PORTFOLIO MANAGERS WHO GOT SCARED BY THE FED POLICY, AND NOT FROM THE ACTUAL POLICY.
The Standard & Poorâ€™s 500 Index has climbed 9 percent since QE2 was announced.
EARNINGS HAPPENED TO BE IMPROVING DURING THAT TIME.
At the same time, the S&P GSCI index of 24 commodities has risen 16 percent, while oil futures have climbed 14 percent and gold has increased 9.6 percent.
FUND MANAGERS PILING ON WITH CONTINUING PASSIVE INVESTMENT STRATEGIES
Treasury yields rose after tumbling yesterday the most in more than two months as reports showed company hiring and manufacturing growth slowed. The 10-year note yield fell below 3 percent for the first time this year.
THEY ARE WAY DOWN, CONFOUNDING MOST OF THE ‘EXPERTS’
â€œIf youâ€™re just a U.S. investor, be careful because Treasury bonds are at yields that probably canâ€™t stay this low for long, and equities have been pushed up by QE2,â€ El-Erian said. â€œThe key issue for us is, remember markets are global and opportunities are global.â€
THE KEY ISSUE IS WHERE MARKETS THINK THE FED IS GOING TO SET THE FUNDS RATE INTO THE FUTURE.