by Michael Roberts
Stock markets rocketed up and the dollar fell on the news that
the US Federal Reserve had decided not to reduce its planned monthly
purchases of US government and mortgage bonds after all. The prices of
shares and commodities shot up because investors concluded that the US
central bank was going to continue a while longer with its huge
injections of ‘liquidity’ (dollars) into financial markets. They had
been told by the Fed in June that it was getting ready to cut back on
its purchases of bonds starting this month. But the Fed decided to
wait.
Part of the reason for the Fed’s delay on beginning the process of
‘exiting’ from printing money was that the bank was still not convinced
that the US economy was growing at a sufficiently fast and sustainable
pace to get unemployment down and to expand without the help of
liquidity injections. Indeed, the Fed reduced its forecasts for US real
GDP growth from its predictions in June from a minimum of 2.3% for 2013
to 2% and for next year from 3% to 2.9%.
Since it began its ‘quantitative easing’ programmes back 2010, the
Fed has purchased nearly $3trn in government and mortgage bonds, or some
20% of US GDP – a huge injection of cash into financial markets. The
Fed was not proposing to stop all further purchases of bonds but merely
slow the rate of purchase by a little bit. Yet its decision just to
hold off for the moment produced a huge boost to financial asset prices.
This shows that what is pushing stock prices to new highs and
fuelling optimism about the world economy is mainly fictitious, based on
central banks (the Fed, the Bank of England, the Bank of Japan and
others) printing money. This cash flows into the banks and financial
institutions, but goes no further. It does not get into the ‘real
economy’, the productive sectors. The economics of ‘quantitative
easing’, ‘unconventional’ monetary stimulus, has been a failure in
kick-starting the world economy
(see my posts, Down the Jackson Hole, http://thenextrecession.wordpress.com/2013/08/28/down-in-the-jackson-hole/
and The failure of QE, http://thenextrecession.wordpress.com/2013/06/26/the-failure-of-qe-2/ .
QE has just fuelled a new property and financial market boom that
last time eventually burst into collapse. The productive sectors of the
capitalist economies remain in the doldrums. It suggests that when the
Fed and other central banks do pull the plug, the world economy could
slip back into a new slump.
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