OSAKA – Now that the U.S. government is functioning again — at least until battles resume in the new year over the debt ceiling — markets have already begun to twitch over the question of when the U.S. Federal Reserve will begin its tapering of quantitative easing or QE, its massive program of purchasing $85 billion of assets each month.
Initially, when the government resumed work after a 16 day shutdown, there were reports, highlighted in a front page lead story in the Financial Times, that tapering of QE could start as early as December. The markets did not like that.
The next day the FT reversed itself and reported that QE would continue until at least the argument over the U.S. debt ceiling was resolved. Morgan Stanley gave tapering a 10 percent chance in December, 30 percent in January and 50 percent in March. Markets regarded this as wonderful news and soared to new records. Some economists think that the Fed may be locked into QE for QEternity, so Mr. Market should be extremely happy.
But hold on, can we please have a proper debate about major policies and their consequences before going full steam ahead with potentially disastrous results.
QE is a prime example. The people who are the most important supposed beneficiaries — the unemployed due to get jobs as QE pumps money into the economy and restores confidence — do not get a say.
Powerful vested interests are at work influencing the debate. Worst of all, there is too much sloppy thinking and reporting.
December tapering would have the advantage of taking some of the heat off Janet Yellen, if she’s confirmed as Federal Reserve chair, so that she doesn’t need to initiate a controversial process when she takes over from Ben Bernanke in February.
But the gloomy September U.S. jobs report, delayed by the government shutdown, suggested that the economy was not recovering as fast as hoped.
Indeed, that report itself was a study in how tricky and devious statistics are. The report said that 148,000 new nonfarm jobs had been added in September, fewer than the 180,000 that most analysts had been expecting. Even though markets take the figure seriously, it is notoriously prone to later correction, with a margin for error of plus or minus 100,000 jobs.
The U.S. unemployment rate actually fell to 7.2 percent, the lowest since November 2008, so that might be thought to be good news of the recovery continuing. On the other hand, the adult labor force participation rate fell to 63.2 percent, 2.7 percent below the participation rate of 2008. That is 6.6 million missing adults, who have given up looking for jobs.
Sadly, although economists pretend that theirs is a scientific discipline, the so-called laws of economics are quite likely to be scuppered by human beings making decisions on whim or fantasy and, indeed, by politicians clinging to policies in the face of reason, logic and even fact.
An example is George Osborne, the U.K. chancellor of the exchequer, who persists in favoring austerity in spite of the evidence that it has kept growth lower than it would have been, is eating into the government tax take, pushing deficits higher and is keeping unemployment higher than in other periods of economic recovery.
Marc Faber, the so-called Dr. Doom of Hong Kong and Chiang Mai, has questioned the very foundations of QE, claiming that it is a policy whose main achievements are to support the “Mayfair economy” — meaning the mega-rich who can afford to live in the posh area of London — and to “boost the prices of Warhols” (art by Andy Warhol).
He complained: “The people at the Fed are professors, academics. They have never worked a single day in the business of ordinary people. They don’t understand that if you print money, it benefits basically a handful of people maybe, not even 5 percent of the population.” Faber rejoices in being a maverick, but other distinguished pillars of the City of London are also beginning to voice their concerns about where QE is taking the world.
Nigel Wilson, chief executive of Legal & General, one of Britain’s largest insurers, said recently, “QE is a policy designed by the rich for the rich.” And a leading pensions expert accused the Bank of England through its own QE policy of “taking more money from people’s pensions than Robert Maxwell ever did.”
Lord Adair Turner, a pillar of the British financial establishment, pointed out in a recent landmark speech that such has been the growth of financial markets that only 15 percent of credit creation today goes into investment, leaving the remaining 85 percent swirling around to go into real estate or boosting other asset prices.
No wonder unemployment is 7.2 percent in the United States and 7.5 percent in the United Kingdom, even as Wall Street is soaring to new records.
Yellen, who is regarded as a dove on the question of tapering, might want to ponder how much of the money the Fed is pumping in supposedly to sustain economic growth and curb unemployment is actually reaching the real economy.
On the other hand, for emerging market countries, even those as large as Brazil, China and India, tapering poses real problems, as was seen recently when there were rumors that it was imminent and large sums fled back to the U.S., shaking global markets and currencies.
Recent important work by professor Helene Rey of the London Business School shows how vulnerable emerging market economies are: If they allow free movement of capital, they have little monetary independence. She has calculated that prices of risky assets, such as stocks and bonds, move together across the global economy regardless of whatever exchange rate regime is in force.
Central bankers have few defenses against floods of money pouring in or going out. The most important force impelling these global swings of capital is the U.S. Fed and its decisions on interest rates or QE or not to QE. Yet the Fed itself insists that its policies on QE and interest rates must, by law, be set with the U.S. economy alone in mind. This is a lazy argument.
It is time for the Fed and the U.S. to understand that they, too, are part of the global economy and it is time to consider the feedback loops that may bite them too.
Policymakers in Washington cannot pretend they live on their own desert island or they may one day get marooned on it.
Kevin Rafferty is a professor at the Institute for Academic Initiatives at Osaka University.