Over the past year, the Federal Reserve added $991.2 billion to its security holdings.
On August 1, 2007, the Federal Reserve held total assets of $907.5 billion.
On October 30, 2013, the Federal Reserve held total assets of $3,886 billion.
On October 30, 2013, commercial banks held reserve balances with Federal Reserve banks that amounted to $2,435 billion. This balance is $1,000 billion higher now than it was on October 31, 2012. On August 1, 2007, commercial banks held a little less than $11 billion in reserve balances with Federal Reserve banks.
Year-over-year through the second quarter of this year, real GDP in the United States rose by 1.6 percent. In 2012, real GDP rose by 2.8 percent year-over-year in its second quarter. The same figure for 2011 was 1.9 percent and in 2010, the rate of increase was 2.7 percent.
Year-over-year through the third quarter of this year, industrial production in the United States rose by 2.5 percent. In 2012, industrial production rose by 3.3 percent year-over-year in the third quarter. The same figure for 2011 was 2.5 percent and in 2010, the rate of increase was 7.5 percent.
The current policy of the Federal Reserve is to acquire $85 billion in securities every month. Over the past five weeks, the Federal Reserve added $103 billion in securities to its portfolio. Over the past 13-week period, it added $275 billion.
In the banking system, demand deposits continued to rise at double digit rates, 11.4 percent, year-over-year, in the same general neighborhood as they have increased over the past four years. Also, savings deposits rose by 8.5 percent, year-over-year while small time deposits dropped by more than 16.0 percent.
The move in funds continued to go from thrift institutions into the commercial banks. Saving deposits fell by more than one percent, year-over-year, at thrifts, while small time deposits dropped by almost 22 percent. Thrift institutions continue to decline in importance.
Bottom line, people continue to move money from short-term low interest-bearing assets into currency and transaction balances. The increase in the money stock measures continues to come from portfolio re-arrangement and not from monetary stimulus.
Therefore, from the financial side, the economy does not seem to be benefiting much at all from the quantitative easing of the Federal Reserve. And, there does not seem to be any indication that the economy will benefit at all from the actions of the Federal Reserve in the near future.
Still, the Federal Reserve continues ahead with quantitative easing stating that it will continue to follow this policy until the economy shows signs of a faster recovery.
But, what if the economy is not capable of sustaining faster economic growth at this time. What if the "new" normal trend for economic growth is around 2.0 percent? The average growth rate of the real GDP numbers for the past four years presented above is 2.3 percent. As a growing number of economists are arguing now, the economic environment may have changed, the work force is not growing as it did in the last half of the twentieth and labor productivity has dropped substantially. The United States just may not be able to return to the standards of the past sixty years. The credit inflation we have experienced since the early 1960s may not work any more.
Additionally, maybe the behavior of people has changed. In the 1960s people began to act differently. People came to expect more and more credit inflation and the economy changed. We observed these changes in three different areas. The grand period of inflation in housing prices began and continued on until the middle of the 2000s. Financial institutions became the place to be as financial innovation took over the economy and more and more workers moved into financial service jobs than manufacturing jobs. And, companies like General Electric and General Motors started up financial wings and by the end of the twentieth century began to earn more than fifty percent of their profits from their financial business.
Now, with the Federal Reserve moving into high gear with its quantitative easing, the wealthy are moving money into financial transactions and not into manufacturing. These monies have learned over the past fifty years what really pays in an environment in which the Federal Reserve and the federal government do nothing but pump more and more money into the economy. Hence, Mr. Bernanke and the Federal Reserve are just feeding the monster that they have created. But, they don't seem to understand this.
Furthermore, they seem to think that "forward guidance" is the way to change behavior. Mr. Bernanke has argued from early on in his reign that the Fed needs to be open and transparent. Yet, he believes that the financial markets don't understand him. In desperation, almost, he pushes for more and more openness and transparency, now producing forecasts of interest rates for two years or more.
Get real! This concern, I believe, is his problem in that he cannot get people to do what he wants and he is seeking all means possible to produce the outcome he desires. He just doesn't understand.
Under the leadership of Mr. Bernanke, the Federal Reserve has basically followed a policy of "throwing all the crap it can against the wall and seeing what sticks" and telling the financial markets what the result of all this crap-slinging will be.
Unfortunately, I don't see the situation at the Federal Reserve changing under Ms. Yellen.
My fundamental question then becomes…what should market expectations be?
The financial markets have learned over the past fifty years that sustained credit inflation, even at much lower levels than we are experiencing now, produces substantial increases in asset prices…houses, stocks, bond prices, commodities, and so on and so forth…and not in real output or flow prices Sustained increases in credit inflation do not create sustained increases in economic growth or in employment.
So, the rewards for continuous financial injections come in finance…not in real output! The Federal Reserve has not seemed to catch on to this.
If this is true, then think about this for a minute or two. Finance is just information…it is just 0s and 1s. Why shouldn't the increase in demand for information contribute to the need for better, faster, and more extensive development of information technology? And, this relationship becomes cumulative. The demand for more information adds to the demand for advancements in information technology which circles back and creates more demand for information and so on.