A new study published by the San Fransisco Fed yesterday confirms what a few of us have seen all along: trillions of Fed bond purchases over the past 3 years have added maybe a miniscule .13 to annual GDP growth:
“QE2 was announced in the fourth quarter of 2010. Real GDP growth in that quarter was 1.1% and personal consumption expenditure price index (PCEPI) inflation excluding food and energy was 0.8%. Our estimates suggest that, without LSAPs (Large scale asset purchases), real GDP growth would have been about 0.97% and core PCEPI inflation about 0.77%.”
The report does not go into an assessment of the negative impacts, costs and systemic risks magnified by the Fed’s asset purchase programs over time. A full cost accounting that did include these factors would no doubt come up with an even more negative assessment.
“Asset purchase programs like QE2 appear to have, at best, moderate effects on economic growth and inflation. Research suggests that the key reason these effects are limited is that bond market segmentation is small. Moreover, the magnitude of LSAP effects depends greatly on expectations for interest rate policy, but those effects are weaker and more uncertain than conventional interest rate policy.” See: How stimulatory are large-scale asset purchases?
So negligible effect on economic growth but enormous effect in levitating stock prices and manufactured bank earnings…and therein lies the canyon of capital risk that the monetary authorities have aided and abetted for the real world today–the third round of asset bubbles facilitated by them in the past 15 years. Over to you Ben…