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QE Calculator Misfires

|Includes:SPDR Dow Jones Industrial Average ETF (DIA), QQQ, SPA

 



In a NY Times article this morning, Eric Rosengren, president of the Federal Reserve Bank of Boston was defending the Fed’s recent QE actions. In his view the $600bn QE program will decrease unemployment by .5% by the end of 2012. According to a quote attributed to him, “This would translate into 700,000 additional jobs…” Okay, sounds good. We need jobs.

Hang on, let me get my napkin. This works out to $857,142.86 per job. Ouch that seems a bit spendy is these days of austerity. Let’s see what the numbers reveal. Assuming this policy creates all 700k jobs and the average income in the US is 42k that works out to $29.589bn in salaries annually of which $11.bn is discretionary dollars. That means, excluding the multiplier effects, these people need to keep their jobs for 20 years to recoup the $600bn.

Now, before you go go batshit on me, I realize that this is a crude and rudimentary way to calulate the economic effects of this type of spending. The point of this little exercise is to find out where we would draw the imaginary line in a never-ending QE world. At what point do we dare to say; we have done all we can do.  Does that ever occur? 

Mean-reversion is certainly painful, but an important keeper of a quasi free-market system. Maybe we’ve already had it and we are now in the new normal. I don’t know. I do know I will be placing my investment dollars on the opposite side of that trade.



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Stocks: DIA, QQQ, SPA