The Fed is Pushing on a String

Posted by Jeff Rubin on September 18th, 2012 under SmallerWorldTags: , , ,  • 5 Comments

No matter how hard the Fed pushes, the US economy isn’t going to respond to yet another round of quantitative easing. What ails the US economy is not the cost of credit. From car loans to mortgages, borrowing money has never been cheaper.

The Fed’s aim to stir the economy by printing more money is off the mark. Certainly boosting the money supply will have an affect, but it won’t be on domestic spending, as hoped, but on exports. Ben Bernanke’s explicit promise to keep interest rates at record low levels until at least 2015 will further devalue the US dollar, thereby boosting the competitiveness of American exporters. That will be helpful, but keep in mind that exports are a relatively small component of the US economy. The Fed would need to see truly phenomenal trade gains to achieve the results it seeks for GDP growth, let alone employment gains.

It’s an unlikely scenario given today’s weakening global economic environment. Moreover, the resulting currency appreciation against the US dollar among America’s major trading partners will only exacerbate their own economic problems, while also dampening their appetite for American-made goods.

So what’s the harm in the Fed trying? Inflation is the traditional argument against central banks turning on the printing presses. Whether widespread price increases will take hold this time around remains to be seen. There is, however, at least one price that another round of quantitative easing is bound to send higher—the cost of oil.

Since oil prices are denominated in US dollars, the lower the value of the greenback, the higher the price of oil. What’s more, any policy that is seen to boost economic growth is immediately bullish for oil prices. Note the knee jerk reaction for oil prices following the Fed’s policy announcement last week. The price of Brent crude, the de facto world price, hit a four-month high, while the price of West Texas Intermediate was pushed near $100 a barrel.

Oil traders may be wrong in believing that another round of quantitative easing will have any more lasting an impact on economic growth than previous rounds. But traders are absolutely right in recognizing that any increase in economic growth will boost the demand for oil, and hence its price.

We can’t grow our economies without burning more oil, but the growth we seek will eventually push the price of the fuel out of our economy’s reach. That, in a nutshell, is the quandary central banks are now facing. Unfortunately for the Fed, it’s about to learn once again that no amount of monetary stimulus is going to change that basic constraint on economic growth.

  • Instincts

    The whole world is finally coming to realize that, like it or not, we’re headed for a steady-state economy.  And as predicted, China is already starting to slow down a lot faster than many would have thought.

    How we will adapt as civilizations to this necessarily sustainable way of life is the big question.  And in my opinion, a major opportunity for current and future generations.

  • rfk

    Growth for the sake of growth is the ideology of the cancer cell.
       — Edward Abbey

  • Carol987

    What I want to know is, when will the US announce that the mission to Mars was really about finding oil there and they plan to build a pipeline to Mars to get it.

  • Avpca

    Printing money to buy mortgage backed securities will help the US housing market as well as devalue the US Dollar and help exports as well as fuel inflation.  All of the above will help deal with the budget defecit..  After the US election (assuming Obama wins) you will also see tax hikes, targeted Federal spending reductions, and even more quasi protectionist policies on everything from auto imports to zippers..  These and many others tools will be used to deal with the defecit unless of course the world continues to blindly buy US Treasuries forever….

  • G.A. Browne

    It is stunning to me at the vociferous selfishness of the “baby-boomer” generation now evident in the USA. I do not recall or have ever read of a time when a generation of any population has ever shirked their duty to leave a better place for their children to extract an unpaid for entitled life. Our father and mothers defeated Hitler and then turned around and grew the north american and European economies into exceptional powerhouses. Now these ungrateful overweight children of the greatest generation[Tom Brokaw] actually believe and are draining the economic power of their legacy.