By Yann Toullec
Do you remember what the goal of QE (and its infamous sequel QE2) originally was? I mulled over this question all weekend while celebrating Bastille Day and playing pétanque, but could not come up with a clear answer. Was it to avoid deflation? To limit unemployment? To ease access to credit? To help Americans maintain their consumption? To annoy China a little bit? To make the world a better place? All of the above? Well, I don’t need to go back in time to evaluate Bernanke’s performance. From a consumer perspective, QE1+2 have failed ... big time.
Last week, Cullen Roche reviewed a comment from the NY Fed blog which provides a very interesting analysis of how personal consumption expenditure (PCE) was affected during the last recession. First, it shows that real per capita discretionary service expenditures -- which account for about 30% of total PCE -- experienced a 7% peak-to-trough decline during the 2007-09 recession, more than double the largest decrease of previous recessions. Second, the decrease in non-discretionary expenses (i.e. housing, health care and financial expenditures) was much less dramatic than in previous recessions, suggesting that the 2007-09 PCE decrease was discretionary in nature. Also, the recovery of PCE has been slow compared to previous recessions.
Wait; didn’t trillions of dollars get injected into the economy since 2009? So what was the purpose of two years of quantitative easing if consumers still spend most of their earnings in loan repayments? People are still super reluctant to spend money.
In my opinion, Bernanke has failed to address consumption during the recession. The balance sheet of U.S. households has not come back to pre-recession levels and is still heavily tilted toward non-discretionary items. That means Americans’ standard of living is suffering. Quantitative easing might have juiced stock markets and commodities in the medium term, but at the end of the day, economic fundamentals – housing, employment, production – haven’t really improved. With talk of a QE3, will the powers that be ever realize it?
From the chart below, you can see that QE has definitely led to some inflation, while doing nothing for consumer spending. It doesn’t seem like Bernanke has made us feel good enough to spend.
If the QE saga has a part III, then you might take a look at my three Gs – Genesee Railroads (GWR), Genesis Energy LP (GEL), and Goldcorp (GG) – all good diversified ideas for inflation hedging which I found using HiddenLevers' new Economic Scenario Screener.