IN late November 2008 the United States’s central bank, the Federal Reserve (the Fed), began a quantitative-easing (QE) program by buying $800 million of primarily bad housing mortgages. These mortgages were bought from banks in order to keep them from going out of business.
Since then, the Fed has purchased some $4 trillion in various types of government and private-corporation debt, which, in effect, puts an additional $4 trillion into the US economy to stimulate economic activity and growth. The Fed actually does not have any money. It uses accounting tricks—I mean, practices—to create the money. All the accountants care about is that the amount of liabilities and the amount of assets match.
The Fed credits the sellers of the debt with money equal to the amount of debt it buys.
Last week the Fed, following a timetable that was set earlier this year, ended its debt-buying program—well, sort of. It will not increase the amount of debt it holds by buying “new” debt, but will still maintain $4 trillion on its books. So if a $100-million bond matures and is retired next week, the Fed will either go out and buy another $100 million worth of debt to replace it or merely roll the old bond over into a new one.
What is significant is that the Fed will maintain near-zero interest rates, which means that QE’s end means little, as I wrote at this time last year, when the timetable was first announced. Easy and cheap money will still flow into the US and global economies.
What does the end of QE mean to the US economy?
Imagine a friend who goes to the province, then brings back an amulet that was bought from a “shaman,” who guaranteed a big Lotto win. Several months pass and your friend has yet to win big, and you point that out to him. Your friend says, “Yeah, I didn’t win the Lotto, but it still worked. I did not get run over by a jeepney.”
The rationale for QE has been this: The US economy would have been worse without it, even if economic growth did not happen.
In the words of American comedian Bill Maher, “50 years ago, the largest employer was General Motors, where workers earned an equivalent of $50 per hour [in today’s money]. Today the largest employer—Walmart—pays [about] $8 per hour.”
Here is what the man who ran the first QE for the Fed, Andrew Huszar, said three days ago: “QE hasn’t really helped the macroeconomy very dramatically, so, by extension, I don’t believe the end of QE will really hurt the macroeconomy.”
But what about the stock markets? The US government just announced a huge jump in gross domestic product—up 3.5 percent in the third quarter. But this is all government, not consumer, spending, and, believe it or not, much of it was because of US military action against the Islamic State, which added $10 billion per month.
Wall Street, together with the US government, will continue to prop up the US stock market until interest rates go up in 2015 or later.
But what about stock markets like the Philippines’s?
US companies have not used their cheap borrowings under QE to increase their business. In the last two years, IBM Inc. has borrowed billions; almost every dollar has been used to buy back its stock, artificially inflating its per-share earnings and stock price. Since 2006, IBM’s debt-to-equity ratio has gone from 50 percent to 250 percent. Can this last? Of course not. But is the US government going to allow half of its Top 500 companies to go bankrupt, just to bring common sense back into the financial system? I think not, at least, not anytime soon.
Money seeks genuine value, and that is what may eventually cause a potential collapse in the West. But, in the meantime, that money people will continue to play ball with the Fed and the US government, while seeking real investment value in places like the Philippines.
The party is not over. The Fed will just not be bringing out additional punchbowls while it continues to refill the existing ones, even if it does so a bit more slowly.
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E-mail me at mangun@gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.