Man Who Sold the World

The U.S. stock market notched a third month of gains in August! Friday’s premarket pump kept the longest monthly rally alive for everyone to enjoy the holiday weekend.

Ben Bernanke made no earthshaking announcements on Friday, at his annual appearance at the Kansas City Fed's economic symposium in Jackson Hole, Wyoming.  As the Economist reported:

“The world was wondering whether [Ben] would send a definitive sign that action was coming. He did not, merely repeating the key sentence from the August statement, that the Fed ‘will provide additional policy accommodation as needed to promote a stronger economic recovery.’ This should not have been surprising; Fed chairmen don't like to front-run the Federal Open Market Committee [FOMC].

“Mr Bernanke had a different goal than signaling to Wall Street. Pressure on the Fed has become intense in the last year, from hawks and conservatives (not necessarily, but increasingly, the same) who think the Fed has done all it can do and going further risks inflation, monetization of the debt, and a loss of credibility for the central bank; and from doves and liberals who accuse Mr Bernanke of having shirked his responsibility and his own prior advice to the Bank of Japan by not more aggressively using the tools and alternative frameworks available to boost employment.”… (The road to QE3)

Wondering whether Bernanke's hands will be tied going into September, and speculating on a relatively decent non-farm payrolls number for August, Bruce Krasting wrote, 

"I would think so, but I don’t think like Bernanke.

"If the economy produces, on average, only 150k new jobs per month, then the unemployment rate will remain high (8+%), for a long-time. Ben doesn’t want that as his legacy. The talk on Wall Street (and the manipulated financial press) is that a new round of QE is coming in a fortnight. It will be $500B in size (spread over 6 months). It will be directed at MBS securities…

"There are extremely asymmetrical results associated with more QE. Yes, there might be a few more months of 'party time.' But when the party ends (it will), the cost will be ten times the short-term gain.

"Ben Bernanke can afford to throw another party in September. The reason is that he will not be around when the inevitable cleanup of his mess starts. He’ll be back in Princeton when the SHTF."… (SSA on NFP, Unconventional Policy and the Hangover)

Of course, the upcoming presidential election raises the stakes and politicizes the Fed’s actions.

Jobs gained in the ‘recovery’ have largely been jobs paying lower wages. In last week’s

MarketShadows, we discussed a study by Senier Research showing that median household income fell 4.8% to $50,964 since the recession ended in June 2009. Data from the Naional Employment Law Project shows why. During the recession, employment losses occurred throughout the economy, but were concentrated in mid-wage occupations. In contrast, during the recovery, employment gains were concentrated in lower wage jobs. Lower wage jobs grew 2.7 imes faster than mid-wage and higher-wage jobs. Specifically:

Not surprisingly, the National Employment Law Project also concluded that, “The unbalanced recession and recovery have meant that the long-term rise in inequality in the U.S. continues. The good jobs deficit is now deeper than it was at the start of the 21st century.”

Since the financial meltdown in 2008, the Fed has been expanding its balance sheet. Bernanke believes, without evidence, that his balance sheet policies are effective: “After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve's large-scale purchases have significantly lowered long-term Treasury yields… These effects are economically meaningful.”

Economically meaningful to some. The stock market has responded to the balance sheet expansion lock-in-step. But does quantitaive easing increase employment? Not significantly. Has it helped the middle class? No. (Bruce discusses this in SSA on NFP, Unconventional Policy and the Hangover)

QE gives money to the banks, which were theoretically supposed to lend out excess reserves. However, individuals have enough debt and have been de-leveraging. Small businesses have not been hiring, but have been complaining that is it difficult to secure loans. While large companies have money on their balance sheets, many have been laying off workers.

In effect, QE primarily benefited the banks and the stock market (higher net worth individuals). The banks have taken systemic risks in the market. Indeed, evidence demonstrates that quanitaive easing helped the banks and the largest companies, but not the little guy or the American economy as a whole.

Over   the   past   few   years,   the   government   has   been   a   drag   on   the   US   GDP   growth.   ‘Austerity’  measures  implemented  by  Obama   and   Congress   have   been   pulling   growth   the   wrong   way.   It   seems   counterintuitive,   because  the  deficit  is  growing!  What  is  the  gov-­? ernment   spending   our   money   on?   Defense,   Health   and   Human   Services,   and   interest   on   the  debt  itself.

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