Where the money went

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  • money-velocity-bank-reserves

    The benefits to the economy through the Fed’s quantitative easing is obvious from this chart. If the money had flowed through the banks back into the economy, you would see an entirely different chart. The fact is that the banks just held on to the money. The red indicates the growth of bank reserves during QE1 and 2.

  • Announcing a new round of Quantitative Easing, QE3, Bernanke said the open-ended purchases of securities should help bolster the confidence of American consumers and businesses by showing that the central bank is determined to stop the economy from weakening.

  • “By assuring the public that we will be prepared to take action if the economy falters, we’re hopeful that that will increase confidence, make people more willing to invest, hire, and spend,” Bernanke said.

  • Purchases of housing debt should help the housing market, which he called “one of the missing pistons in the engine.”

  • “Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing,” he said.

  • Did it? That’s the fundamental question.

  • if banks held on to the reserves created through the purchase of these securities, then they weren’t making loans and there could be no significant impact on the housing market.

  • The problem is inherent in the economy itself, a lack of jobs, a deep fear that still lingers among businessmen to expand when things are so tight. Bank reserves do not add a single dollar to the economy. The money essentially is in storage. Where is the incentive to make loans — to whom and for what?

  • Here’s what actually happened to home sales following QE1 and 2.

  • Paul Barrow's photo.

    One of the biggest factors affecting the housing market is that too many people still owe more money on their homes than their homes are worth. “According to the third quarter Zillow Negative Equity Report, the national negative equity rate fell at its fastest pace in the third quarter, dropping to 21% of all homeowners with a mortgage underwater from 31.4% at its peak in the first quarter of 2012. In the third quarter of 2013, more than 1.4 million American homeowners were freed from negative equity, and 4.9 million mortgaged homeowners have been freed since the beginning of 2012. However, roughly 10.8 million homeowners with a mortgage still remain underwater.” (www.zillow.com)

  • Paul Barrow's photo.

    What is interesting about this graph is that clearly the traditionally wealthiest parts of the country have been the hardest hit.

  • “Home value appreciation has been the main factor driving down negative equity rates, specifically in very hard-hit states such as California, Florida, Nevada, Arizona and Georgia. There has been a negative equity feedback loop, as regions with high negative equity have experienced acute inventory shortages brought on in part by locked-in underwater homeowners.” (Zillow.)

  • “On average, a U.S. homeowner in negative equity owes $74,632 more than what the house is worth, or 41.8% more than the home’s value.”

  • The Zillow figures originate from the third quarter of 2013. What they fail to show is that the impact, mostly psychological, was short-lived.

  • Here’s a graph from the National Association of Realtors showing what happened to price appreciation during the final quarter into January 2014.

  • Paul Barrow's photo.

    Going back to the first chart I posted here, the graph shows a rather steady slide in the velocity of money. What does that mean? According to Wikipedia, “The velocity of money (also called velocity of circulation of money and, much earlier, currency) is the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.] If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.” The implications would suggest the effects of inflation. Higher priced goods and services reduce purchasing power, and fewer goods and services are purchased.

  • The classic definition of inflation is “too much money chasing too few goods.” Low rates and QE were intended to help revive a stalled economy, but unfortunately, demand has not risen, but rather, the velocity of money has dropped like a rock.

  • Who profited from QE? Who else but Wall Street. “Bernanke first indicated the FOMC was willing to unveil a second round of quantitative easing, or QE2, at a now famous, or infamous, speech given in Jackson Hole. Equities rallied sharply on the news and continued on an unprecedented rally.The S&P 500 went through the roof, peaking on April 29, 2011 at 1,363 points, up 28.1% in 8 months.” (Forbes.com)

  • Paul Barrow's photo.

    Equities around the world tumbled after S&P downgraded U.S. sovereign debt, along with continued sovereign debt woes in Europe, as large economies like Spain, Italy, and even France came under fire in late July and early August. (Forbes.com)

  • What is causing inflation if banks aren’t spreading some of that money around? It’s been the decline of the dollar. Here’s what happened during QE2: The dollar progressively declined in value in relation to its major trading partners throughout all of QE2. What we buy at WalMart typically comes from emerging markets. As measured by the UUP ETF, the dollar’s value fell 11.6%. QE was blamed for “unfairly” appreciating emerging market currencies and sparking a “currency war” in the words of Brazilian Finance Minister guido Mantega, it was blamed for putting upward pressure on commodity prices and causing inflation around the globe (indirectly leading to uprising across the Arab world), and, most prominently, for fueling a massive rally in gold.

  • Paul Barrow's photo.

     

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  • Gold during QE2:

  • Paul Barrow's photo.

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