The US experience of QE

The United States began their programme of quantitative easing (QE) late in 2008 as a response to the Global Financial Crisis (GFC). Since that time, the US Federal Reserve has purchased $1.9 trillion of assets, keeping their financial markets afloat and lowering the US exchange rate. A lower exchange rate helps exporters.

I asked the Parliamentary Library to prepare statistics on the performance of the manufacturing sector in the wake of the GFC and QE. The results are mostly positive.

The GFC hit the US manufacturing sector hardest in 2009; exports contracted and hundreds of thousands of jobs were shed in this sector. But from 2010 onwards, manufacturing has turned around creating an average of 18,000 new jobs each month.
Source:  Federal Reserve Bank of St Louis, Real exports of goods & services.

Real exports volumes of manufactured goods are up and on a much steeper growth path than historically, although it is now slowing from double digit growth in 2010 (14.4%) to a more modest 4.2% growth rate in 2012.

Over this time period, inflation has remained subdued despite the massive credit easing. Since August 2008, inflation in the USA has been 5.2%, which equates to an average annual inflation rate of just under 1.3%.


34 Comments Posted

  1. The US OCR equivalent is at 0.25% – they can’t go any lower so had to look into other options such as QE to keep the growth model alive a bit longer.

    It’s not initially inflationary as it’s essentially a balance sheet transaction. BUT once exports pick up due to a lower exchange rate and the money supply increases in the domestic system i’d expect to eventually see some inflation.

    Our major exports are primary resources such as meat, dairy and logs whereas the US seems to be more secondary / tertiary – aircraft, semiconductors, vehicles etc. I would therefore reason that inflation will hit us quicker as we compete on the international stage for primary goods we actually need for our own use + higher cost of imported oil. Assuming of course a rise in demand as our prices become more attractive to other countries. I think our farming and dairy industries are already intensive enough so can’t see supply increasing much to match the increase in demand…

    What happens when more countries jump aboard the printing press? Worst case scenario – round after round of printing as each country tries to maintain an advantage over the others sparking worldwide hyperinflation?

  2. What is sorely lacking is any analysis of the likely effects in the context of the NZ economy. The Greens need someone – an Economist – who can talk through the likely effects.

    My own concern is that the printed money would just inflate house prices further.

    And please, if you intend to reply to this post by saying something along the lines of “Economists don’t know anything about Economics, the GFC proved that”, please save your time and don’t bother. You just sound like every climate change denier who chooses to believe that 95% of all climate scientists don;t know anything about climate science….

  3. BJ,

    Thanks for your response. I hope you’re right about Russel, it’s just that I’ve no way of knowing for certain.

    By the way, I think that, globally, the environment is already forcing things (in many ways) and it may not be too long before that becomes obvious to even politicians.

  4. “There is no level of debt that the USA can’t sustain. “

    Not quite dbuckley – they are a lot less sensitive, but they are also vulnerable… as China and other countries are working out bilateral trade agreements that are cutting that reserve currency immunity back, and as the instability of the overall system continues to increase.

    Also the USA is not the only country doing the QE shuffle. In all countries actually doing it that I am aware of, apart from the Swiss, it has been a function of keeping TBTF banks afloat. The proposal we have made has to do with actually using it to produce something – a new city. It is a different take on QE from the norm. As one wag above somewhere noted, we can thank the Aussies for restraining their banks and keeping us out of QUITE so much trouble.

  5. The housing in and around Christchurch needed to be started when the ground was still shaking mate. It isn’t that hard with houses. The central city is another problem but the housing problem in Christchurch is a problem that didn’t have to get as bad as it did. It is that to which I am referring Shunda, and if it came to it, in most places, one could build the damned houses DURING the earthquakes.

    One could certainly be creating the new suburban areas, putting in the roads and setting up the sections and infrastructure. Houses go up pretty quick once that is done… but that wasn’t done.

    The old ways were used instead. This is partly a matter of the extremely dysfunctional housing “process” in New Zealand. In a way it was an opportunity to fix/change that process, but it was tossed away.

  6. It’s always a big mistake to extrapolate anything based on the USD.

    The USD is an outlier currency for many reasons, heres just two:

    Firstly, the USD is everyone’s favorite reserve currency, so ther is always a demand for USD for that purpose. Also because of this, no country of any signficance has any interest in rocking the USD boat; if the USD goes down then everyone loses.

    Secondly, almost all oil is transacted in USD, so if a country wants to buy oil, they have to get USD first. Thus there is always a demand for dollars. If we guess that 50m barrels of oil are bought by countries other than the USA per day, at nearly $100 a BBL, then a bit of math shows that about $5b USD is needed daily just for oil purchases. So $40b of QE monthly is a small fraction of the USD required for oil.

    For at least these reasons, the USD is immune to normal economic thought. There is no level of debt that the USA can’t sustain. They can print money with impunity. No-one else can do that.

    Norman would also do well to remember that whereas all this printed money has done a lot of “saving”, and thus there are winners, there are also a lot of losers in the USA.

  7. Shunda – Christchurch rebuilding should have started a year ago, not last month.

    A year ago? when the bloody ground was still shaking? that doesn’t sound particularly smart.

    National AND the Christchurch Council have been horribly delinquent in handling their responsibilities.

    That’s just untrue, ‘issues’ don’t = delinquency.

    You’ve been visiting planet Key, haven’t you. The lotus flowers are yummy there, aren’t they.

    Gee that is getting old BJ (planet Key got old 5 mins after it was first uttered) I am not the one on another planet here, perhaps I am free of the delusions of political ideology and ‘us and them’ thinking and can simply base my judgements on the issue at hand.

    I don’t have a bent for worshiping “lord Keysus” but I am not going to label him Satan just yet either.

    You lot have to by definition it would seem.

    I hope you all enjoy watching Campbell live tonight, I am sure there is another dose of utter bullshit and astonishingly ignorant journalism on offer to reinforce paranoid delusions.

  8. I think it is almost certain that all of the reasons Heinberg cites for the end of growth will steam roller us

    Yeah… I doubt that we are going to get to make more than a couple of steps before the excrement hits the rotating ventilation device myself, but I’ve had a few short yarns with Dr Norman, and I am confident he hasn’t lost sight of the main goal.

    I expect something of an economic “crater” from some of our trading partners around the New Year… but it is really quite difficult to predict how long the jugglers can keep all those bottles of nitroglycerine in the air. It isn’t like they lack incentives 🙂

    The main event will come when the environment forces it, and that’s a different timing. A bit longer I think. I don’t think it will be sudden environmentally (I hope not) but the economic failure that results will be rather more complete than the fools running the Eurozone and Fed can create by themselves.

  9. If you say so, BJ. But it’s only a step in the right direction if the direction is determined first. If not, it’s only a step that appears to be in the right direction but could be followed by a step in the opposite direction. You’re quite certain that this was fully thought through but I can’t be so certain, because I’m not privy to Russel’s policy making apparatus.

    I’m not really impatient, because I think it is almost certain that all of the reasons Heinberg cites for the end of growth will steam roller us without us recognising them at all. So, given that I don’t think there is any way out of our predicament, there is nothing to be impatient for except, perhaps total collapse. As painful as that may be, those who survive, and future generations, may have something worthwhile to build on if it accelerates.

  10. @Tony

    In order to get to where a stable steady state economy is possible we have to alter things like who controls the money and what the money represents. Right now we have endogenous debt-based money, and economies are highly unstable.

    This is a step in the right direction and we cannot start without first stepping in the right direction. I appreciate your impatience… and the reasons for it… but there isn’t any easy way. It is neither necessary nor possible to do it all at once.

    You can believe it or not, but I am quite certain that this was very carefully thought through. It is almost perfectly tuned for NZ, and it is clearly something that Key perceives as a threat. It is a POSSIBLE thing, and it makes his own operations look bad. He’s had things his own way for a long time now, and he’s gotten it mostly wrong (as far as NZ is concerned… but the banks have done well enough).


  11. BJ,

    Of course, growing local businesses for a while will consume less resources than continuing to import goods and services, but at some point that growth will have to stop, as growth is not sustainable. Russel doesn’t show that he understands that. Maybe he does understand but there is nothing in his proposals that move toward sustainability; he is only interested in appearing to show that he knows how to get the economy moving again. It’s not Green thinking, maybe not thinking at all.

  12. We are paying the interest to ourselves… not to Australian banks.

    I don’t generally charge myself interest if I borrow from myself but I take your point that there CAN be interest put on the borrowing, and there might even be reasons to put some interest on the borrowing.

  13. If we borrow from OURSELVES we don’t obligate our children to pay interest.

    Not quite, BJ.

    Future generations may still have to pay for long term debt accrued as a result of spending today via some degree of taxation – it really depends on the debt terms as to whether it’s inter-generational.

    But as plenty of us have pointed out, this obligation has a much more controlled impact as we are not slaves to the whims of rating agencies, foreign financial instos or currency fluctuation.

    By owning sovereign debt ourselves, we get to set (and modify) the terms on an agile basis rather than relying on the tender mercies of the market.

  14. To put Shunda to a bit less work…

    If we borrow from OURSELVES we don’t obligate our children to pay interest.

    If we borrow from the BANKS (as National likes us doing) we do.

    Rebuilding Christchurch is not for free, is it?

    Which is better? Eh?

  15. Shunda – Christchurch rebuilding should have started a year ago, not last month. National AND the Christchurch Council have been horribly delinquent in handling their responsibilities. You’ve been visiting planet Key, haven’t you. The lotus flowers are yummy there, aren’t they. 🙂

  16. Or is it the case that Christchurch shouldn’t be rebuilt?

    Christchurch is currently being rebuilt, National have shown sound leadership on the majority of rebuild issues despite what the Greens and Campbell live would have us believe.

    More people in Canterbury voted National in the last election than ever before.

    Russel’s help is not required.

  17. Noteable things usually only happen in the financial markets because the ultra wealthy (and I am not talking about the petty “rich” who the Green party want to tax more) will it to. Seems that Russell is quite compliant on economic matters recently. Say, who is your Puppet Master Russell?

  18. Shunda – Tony

    I suggest that you both stop spouting opinions that aren’t related to the issues and start figuring out what is actually going on. Again, it is not what you are both complaining about.

    Growth of industry locally can reduce resource use… (buy locally remember?… our power is generated from renewable and CO2 neutral sources remember? )

    Do you think that paying interest to banks is a better idea?

    Or is it the case that Christchurch shouldn’t be rebuilt?


  19. From their public statements, I don’t think the Greens have ever been quite in touch with sustainability. But politics makes one stupid so they may be just a bit confused.

    By the way, it’s not just a resource wall that the world is hitting; for all sorts of reasons, growth is probably just about at its end. There are plenty of recent books and articles about that (and plenty of old ones, too) but I do recommend The End of Growth by Richard Heinberg, who was introduced by Jeanette Fitzsimons at a recent talk in Auckland. It’s a shame more people didn’t go.

  20. Hmmm, so insulating people from the consequences of their rampant greed is a good thing, as is manufacturing more crap for people to buy.

    Russel has lost touch with sustainability and become a wall street wannabe. This condition is akin to ‘gold fever’ it’s also a bit like gambling with other peoples money (my kids to be precise).

    Has anyone ever considered that maybe the world deserves to go broke?

    You can manipulate money and stare at graphs all you like in the short term, but the world is about to hit a resource wall and ‘growth’ will become a thing of the past.

    Printing my kids taxes now is hardly a long term solution and resigns them to a very bleak future indeed.

  21. Shunda! ‘..spending our children’s money’ ?!?!

    Do you think money is squirreled away somewhere, to be dug up by later generations? What is important is that the real economy (goods and services) must be adequate to meet the needs of future generations. Money is not the issue.

    The real economy in the future will be more prosperous if we invest now, in education, the environment, and sustainable practices. That is quite different from National and Labour economic proposals to drive down the deficit and further into austerity.

    Austerity will create worse problems for our children.

  22. Shunda

    Where does money come from?
    What does money represent now?
    What IS money?

    …we can’t do what we’d really want to do. We can do this. It IS NOT what you think it is.

  23. I am shocked you guys think spending our children’s money is a good idea, absolutely shocked.

    The reason this worked in the past for the USA is because the ever increasing consumption of planet earths resources enabled it to happen.

    You lot really are bat shit crazy.

  24. Alastair nails it here.

    This is not the useless sort of QE that the US does, but instead it is a more appropriately targeted version.

    I observed elsewhere that the US experience is not that relevant to ANYONE else because they are used as the reserve currency, and Triffin made it clear that that was not as advantageous as it first appears.

    However, QE forever, as much as it takes is the battle cry in Europe, Japan AND the USA… and we can do it MUCH better.

    I suggest that we are on the right track here.

    and they

    and John Key and his supporters here

    are all indulging in this….

  25. I can see what you’re doing here Russel : QE is not a dirty word, on the contrary all the serious people are doing it. So what the Greens are proposing is not strange or radical, but common sense.

    BUT: As practiced elsewhere, QE consists of squirting liquidity everywhere, on the principle that a rising tide floats all boats. But the reality, as others have commented, is that the money gets used to prop up dying banks, or to speculate on commodities, and only part of it trickles down into the real economy.

    What you’re proposing, on the contrary, is… radically different : targeted spending financed by QE. Which is great! because it has a much bigger direct positive effect on the economy, for the same “cost” as “normal” scattershot QE.

  26. Interestingly enough one of the large troughs (leading into 2010) was during QE1, possibly not the outcome we’d want.

    I can’t say I’m a fan of the idea myself but at least Doctor Norman is pushing some opposition policy, something that unfortunately Labour is completely lacking.

    It pains me to say it, but at least the Greens are creating talking points as opposed to just continually trying to score points.

  27. I would take official statistics with a pinch of salt but just what sorts of jobs were created, Russel? From all I’ve read, most jobs are now low paid or part-time work.

  28. QE is working so well for the US. Well it must be – they keep doing it. Any idea how much money they have printed and are intending to print?

  29. Russel – You have floated an idea that is worthy of debate, and could be developed into a valuable policy. But please don’t confuse it with QE in the US. There, money was used to purchase worthless assets off banks, to keep them afloat. Either use the EQ bond money you propose to invest in Christchurch (thus increasing aggregate demand and employment) or use it to reduce the private debt that’s strangling the economy. DON’T give it to the banks. Liquidity is not the issue. Private debt is. And stop calling your proposal QE.

  30. Tbh I’d be wary of using stats like this to tell a story without understanding the source data.

    Without context, what I can read into this graph is massive growth correlating to the industrial deregulation/de-unionisation of the 80s, dot-com bubble of the 90s and the massive growth in ‘financial services’ in the 00s.

    Without the source data, it’s not clear what proportion of this export value is in the form of actual goods as opposed to services.

    Putting on a black hat, the uptick in exports post recession could potentially be in the form of reducing inventories at lower marginal pricing as opposed to new production.

    We just can’t tell from this info.

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