We learn from Bloomberg that investors are skeptical “that the Federal Reserve’s announcement of additional quantitative easing will get Americans to spend more.”
Bloomberg quotes Performance Trust Investment Advisors’ Chief Investment Officer, Peter Cook, as saying, “Aggressive monetary policy, such as QE3, probably will have a limited impact on consumer spending for nonessential goods and services, so the economy will continue to slow.”
The idea is that QE3 – the third Federal Reserve easing – is intended to revive the circulation of money in the US economy. But Cook doesn’t seem to believe it will do the trick … and we are not so sure it would be a good thing anyway. (From a theoretical standpoint anyway.)
As we’ve pointed out previously, we’re not even sure that Fed officials are really so concerned with consumer spending. They are concerned with stock prices (less with bond prices) and they are concerned with bank balances but general macro-economic issues seem to come farther down on the list. Here’s some more from the article:
The relative performance between these funds since August suggests investors “bought the rumor and sold the news,” said Peter Cook…
The recent weakening in discretionary stocks relative to staples differs from 2010, when Fed Chairman Ben S. Bernanke’s speech at the annual Jackson Hole, Wyoming, conference in late August foreshadowed QE2, setting off almost six months of outperformance, said Jack Ablin, who helps oversee about $65 billion of assets as chief investment officer at BMO Private Bank in Chicago…
Now that a third wave of easing has become reality, continued lackluster job growth and the looming fiscal cliff may temper investor sentiment, according to Cook, who helps oversee more than $480 million in assets. If the economy slows further, the central bank could undertake additional action, making a “pro-growth strategy attractive, at least in the short-term again.”
Our perception regarding consumer price is based on theoretical free-market concepts, not on the practicality of Fed efforts. But theory is enlightening when it comes to consumer spending. What the media invariably declines to point out is that there must be demand to satisfy for “easings” to be effective.
If there is no demand, then money will neither circulate nor achieve velocity. This used to be called “pushing on a string,” but these days the financial media seems loath to explain, let alone confront, Fed policies.
But from our point of view, the larger issue regarding consumer spending has to do with asset bubbles. The current environment is the result of one such asset bubble. Is it really a wise idea to create yet another one?
We live in a stimulative era. In fact, the argument can be made that a “normal” economy no longer exists Central bank price-fixing of the price and value of money are constantly expanding and contracting demand … but artificially. This is the result of a pure fiat environment.
Lately, because of all the economic chaos, the idea of a gold standard is creeping back into the mainstream media conversation. Such standards (gold, or gold and silver) would discipline governments and make it impossible for central banks to inflate with abandon.
Central bankers want consumer spending – and tinker with rates and the money supply to get it – because such spending covers up a multitude of monetary sins.
But far more preferable is leaving consumer spending – like the volume of money itself – to be rationalized by the market rather than policy planners.
The current slump in consumer demand is surely an outgrowth of the previous raging demand for consumer and financial products that marked the mid-2000s. While it would be nice, presumably, to see consumer demand pick up, do we really want it do so as a result of central banking policy?
Isn’t that what got us into trouble in the first place?