John Mauldin recently pointed his readers to Hoisington Investment Management’s recently released Q3 Quarterly Review and Outlook.Authored by Van Hoisington and Lacy Hunt, the two go after the Federal Reserve’s easy monetary policies and they view QE3 as “a tacit admission by the Fed that earlier efforts failed.”
Not only have they failed to boost the economy, they’ve also caused “devastation for households.”
The chart below, included in their report, shows that QEs have been accompanied by increased inflation, which erodes household wealth.
During QE1 & QE2 wholesale gasoline prices jumped 30% and 37%, respectively, and the Goldman Sachs Commodity Food Index (GSCI-Food) rose 7% and 22%, respectively. From the time the press reported that the Fed was moving toward QE3, both gasoline and the GSCI Food index jumped by 19%, through the end of the 3rd quarter.
Wages are often described as ‘sticky’ since they fail to quickly adjust to changing price levels. As a result of inflation, real average hourly earnings fell approximately 3% during each round of QE, as shown in the chart below:
Furthermore, the Fed may be overestimating the magnitude of the ‘wealth effect’ – increased spending due to stock market gains – on economic activity. Citing a 2011 study entitled, Financial Wealth Effect: Evidence from Threshold Estimation by Sherif Khalifa, Ousmane Seck and Elwin Tobing, Hoisington and Hunt note that the wealth effect “means a $1 rise in wealth would, in time, boost consumption by less than one-half penny.”
As well, median income households generally do not own a significant amount of equities.
Hoisington and Hunt close:
For Fed policy to improve real GDP, actions must be taken that either (1) shift the entire demand curve outward (to the right), or (2) do not cause an inward shift of the AS [aggregate supply] curve that induces an adverse movement along the AD curve. Accordingly, the Fed is without options to improve the pace of economic activity.
The notion of Ben Bernanke running out of bullets in the chamber might be construed as bad news. However, according to Hoisington, the Fed continues to make the economy worse for households, and doing nothing is a better option than more quantitative easing.