Storm Clouds?

As the panic over the destiny of the Federal Reserve's “quantitative easing” program reaches hysterical proportions, uncommonly bizarre economic anomalies are surfacing. In the last week of June, the news that first quarter US Gross Domestic Product growth report was reduced dramatically from 2.4% to 1.8% was met by an equally dramatic, but paradoxical positive jump in equity markets. Normally, a rather staggering drop in GDP estimates would trigger stock market losses-- investor confidence would be battered. But the opposite occurred. 

What's going on?

Pundits and investors hailed the bad news because they hope that it will keep the Federal Reserve committed to the $85 billion per month bond purchasing project dubbed “quantitative easing.” They believe that the Fed would not dare to relax the program in the face of poor economic performance. And they recognize that without the Fed’s foot firmly pressing the accelerator, the capitalist economy will stagnate or slow. The Federal Reserve program is truly a life-support system for our economy, and capitalism's apologists recognize that they are in deep trouble without it. Therefore, investors welcomed the fall in GDP growth!

Even Paul Krugman, the popular voice of social democratic theory in the US, has caught the contagion of fear. In a late-June appeal in The New York Times (Et tu, Ben?) to Federal Reserve head, Ben Bernanke, Krugman calls for the Fed to keep its foot aggressively on the gas pedal. A firm advocate of an alternative policy option, fiscal stimulus (spending on infrastructure, public works, etc), Krugman holds his nose and urges the continuation of the Fed's monetary stimulus program of printing money for bond purchases.

So why can't we just all agree to get along and urge the Federal Reserve to keep printing dollars?

In the first place, the Fed's policy of dollar-printing promiscuity is losing its healing powers. The effect of the purchase of government debt-- Treasury notes-- in order to restrain bond yields and interest rates has diminished since mid-2012. Moreover, the Fed remedy has lost its magic entirely in May and June of this year, with the yield on the 10-year Treasury note rising by two-thirds, mortgage rates jumping about 27% from March to the end of June, and the US and European (except Germany) bond market experiencing a sell-off. All of these indicators demonstrate that quantitative easing, as a stimulus policy, is simply losing its punch.

The Federal Reserve sees its injection of $85 billion into the economy every month as a hedge against the dreaded deflation, a sure companion to stagnation or negative growth. They watch to see when inflation crosses their target of 2% in order to slap on the brakes to avoid an overheated economy. But there is no reason for the Fed to fret: inflation is well below their target, a clear sign that without monetary stimulus we would be in a deflationary period. Corporations are hoarding cash rather than investing: they are holding 5.6% of their total assets in cash, against a forty year average of 4.4%. It was weak business investment, in part, that caused the first quarter GDP growth revision downward by 25%.

The Chicago Federal Reserve's three-month moving average National Activity index remained in negative territory, underlining the diminishing effects of quantitative easing.

Aside from its ineffectiveness, quantitative easing poses more serious, more fundamental problems: Fed monetary promiscuity distorts markets and masks underlying economic processes. Given that a capitalist economy is an enormously complex organism made up of mutually interactive actors, commodities and processes, manipulating some of the central elements such as interest rates, the money supply, debt growth, etc. can have unforeseen and damaging repercussions in other sectors of the economy. Mechanisms fail and balances are disrupted. A therapy becomes an injury. This is a lesson that the leadership of the Peoples' Republic of China is learning from the volatility created by its shadow banking sector. Even with majority public ownership of the biggest banks, the informal private sector distorts the impact of policy decisions.

In Marxist terms, the massive Federal Reserve intervention in financial markets violates the law of value. That is, it replaces the exchange of equivalent-for-equivalent in financial markets, with exchanges determined independently of market forces by the officers of the Fed. Those exchanges must, at some point, be reconciled; but in the meantime, they distort exchange relationships in other sectors of the economy. They create a disconnect between the financial sector and the signals sent to the productive economy. They distort the rate of profit in the financial sector, channeling capital into speculation and over-reliance on cheap credit. It’s no wonder that corporations hoard cash and seek higher returns on retained capital and easily available capital.

In reality, quantitative easing invites the very conditions that led to the 2007-8 collapse.

And we are now seeing omens in the economic data.

The exuberant 2013 stock market is suffering a retreat, but even more ominously, demonstrating growing volatility. Last year, the small investor jumped back in the market, a sure sign that a bear market was in sight. Much of the volatility comes from market manipulators exploiting the amateur day-traders. Like the swaggering Vegas weekend gambler, they are ripe for the picking. One can watch the picking by following the end-of-day trading; they don't know when to get in or when to get out.

US exports are pulling back.

The post-World War II record profits reported in 2012 are threatened. Of 108 companies scheduled to report profits in the second quarter of 2013, 87 offered negative guidance to their shareholders. Falling profits, contrary to underconsumption theorists, are a better predictor of a downturn than falling consumption. Consumption generally falls as a result and as an amplifier of economic decline.

Today, US consumption hangs precariously in the balance. While savings are declining, wages are in free fall. The year ending in September 2012 experienced a wage decline of 1.1%. First quarter estimates augur a shocking decline. The consumer is simply running out of money, savings, and available credit.

And the just announced June unemployment figures actually show an increase in the more telling U6 calculation to 14.3%. That rate includes those who have dropped out of the job market and those working part-time but desiring a full-time job.

Not a promising picture.

In most of the world's capitalist countries, the labor movements and left political parties have yet to decouple their fate from that of the monopoly capital, profit-driven, market-governed system. They are like ships on turbulent waters unwilling to bring their vessels and crew to port. They are simply counting on the storm to subside. They are neither prepared for nor expecting a hurricane or a shipwreck. After five disastrous years, one would hope that left and labor leaders would began to look for alternatives to capitalism, a safe haven for their fellow passengers.

Zoltan Zigedy

zoltanzigedy@gmail.com