Four years into this unprecedented period of monetary stimulus, and on the precipice of more, two questions are worth asking: Is it working? And is it risky?
The answer to both seems to be, not really. Now that the Fed has expanded its balance sheet to about $2.8 trillion, from about $900 billion in August 2008, the strategy appears to be suffering from the law of diminishing returns. The more you do something, the less effective it becomes over time. Not only that, but monetary easing isn’t really a good solution to what’s wrong with the economy. U.S. economic growth is anemic because demand is low. And demand is low because a) growth has consistently been weak, and b) we’re still working our way out of a huge credit boom.
“It’s hard to stimulate demand with low interest rates when low interest rates aren’t the problem,” says David Rosenberg, chief economist at Gluskin Sheff & Associates. Consider this: For the first time ever, household net worth has contracted over a five-year period, as Rosenberg pointed out in a note this week to clients. The remedy to that problem isn’t lower rates.
Lacking any fiscal action from Congress, Ben Bernanke has been left with no choice but to do something—anything. The risk of all this easy money sloshing around the economy is that it creates inflation. That’s the theory, at least. So far it hasn’t happened.
The Fed may be printing money, but no one’s doing anything with it. Just look at the banks. The gap between deposits and lending is now a
record $1.77 trillion. The capital the banks are deploying is being ploughed back into the U.S. Treasury market. Banks have already bought double the amount of Treasuries they did in 2011, pushing their holdings to an all-time high of $1.84 trillion.
“Let’s say you bake a cake, but no one eats it,” says Neil Dutta, head U.S. economist at Renaissance Macro Research. “It’s the same thing with the Fed.”
