Thursday, August 12, 2010

Quantitative Easing and Learning to Live with Less


So as we slide merrily towards the “D” word – deflation or for the optimists among the pessimists, “double-dip” recession – what can the government do about this threat? Especially since Congress appears to want to prove to the electorate that it will not spend more money to stimulate the economy, even as a last resort? Mid-term elections approach! And stuff is going from worse to “OMG, you wouldn’t believe how much worse.”

“A wide-ranging sell-off on Wall Street sent stocks into the red for the year [on August 11th] after unexpectedly bad economic news from three continents reinforced fears that the global recovery is faltering.” Washington Post (August 11th). China can’t sell what it makes, England is in austerity land and watching the employment numbers drop… and our trade deficit – that nasty indicator of how much we import over how much we export – soared to $49.9 million last month. What’s a government to do? The Federal Reserve can’t reduce effective interest rates to below zero – although it could save more than a few bucks by refusing to lend to institutions that borrow money from the Fed to use for their own trading accounts (like Goldman Sachs, that perennial bad boy that the government seems powerless to control). So what else is in their economic quiver?

“Quantitative Easing.” QE to those who love acronyms.The August 9th DailyFinance.com explains: “Quantitative easing was first used by the Japanese government to try to reverse stubborn deflation during the 1990s. It has also been called printing money. Essentially, the Fed issues new money and uses that invented cash to buy assets such as mortgage-backed securities or Treasury bonds from banks. The banks can then, in turn, lend that money to customers and -- presto! -- the money supply has been expanded, supposedly stimulating the economy.

“After the crash of 2008, the Fed deployed quantitative easing on a large scale, buying $1.25 trillion worth of mortgages and debts of state agencies. While its balance sheet in normal times had been $850 billion, it has now reached a whopping $2.3 trillion… In fact, the Fed had started to let its balance sheet shrink as the economy improved. It closed several credit programs, such as one designed to bolster the market for commercial paper, and in March it stopped buying mortgage-backed bonds and Treasury bonds, which it had been doing since the depths of the financial crisis. But there are signs that policy may be changing.” On March 10th, the Fed began the implementation of their QE policy: "Federal Reserve officials agreed … to a new step aimed at supporting the economy by reinvesting money from Fed-owned securities as they mature. The action signaled deeper concerns about the slow pace of the economic recovery." Washington Post (August 10th). Note how the markets crashed on August 11th – too little, too late they screamed.

But without a tad more government “stimulus” to make up for the failure of consumers to spend – something this Congress is unlikely to do – what’s the going forward model we seem to be approaching? Japan? They got this “failure” thang down! Stimulus? Way too little, way too late. Here is a nation where cradle-to-grave corporate employment was supposedly the model: folks graduated from college and took a job in a Japanese mega-corporate structure with steep traditions in seniority, long hours and moderate pay… in exchange for an unwritten pledge of lifetime employment. It was the rule, until global competition and a nasty set of recessions made Japanese companies rethink the policy, betraying hordes of senior managers who found themselves on the street. But that’s only the tip of the longer term failure mode that seems to define modern Japan.

What do you do if you are a Japanese college grad, ready for the job market? Poor economic conditions have afflicted Japan for decades now, with the most recent drop dealing a particularly horrific blow to the job market. It seems that for many youths, the job market has been unforgiving with few prospects for improvement anytime soon. They may have become Japan’s “lost generation”: “The gap between extremes of income at the top and bottom of society … has been growing in Japan for years. To the surprise of many outsiders, once-egalitarian Japan is becoming a nation of haves and have-nots...

“More than one-third of the workforce is part-time as companies have shed the famed Japanese lifetime employment system, nudged along by government legislation that abolished restrictions on flexible hiring a few years ago. Temp agencies have expanded to fill the need for contract jobs as permanent job opportunities have dwindled.” DailyFinance.com (August 6th). Younger people, often living at home with incomes generated from part-time and occasional contract work, are often left with a fraction of what they might have expected to have earned, corrected for inflation, decades ago.

They have become “freeters” (a combination of the English “free” and the German “Arbeiter” – worker): “The freeters have also come to see diminishing value in the grueling study and tortuous examinations required to compete for the elite jobs in academia, industry and government. With opportunities fading, long years of study are perceived as pointless. In contrast, the freeter lifestyle is one of hopping between short-term jobs and devoting energy and time to foreign travel, hobbies or other interests.

“As long ago as 2001, Japan's Ministry of Health, Labor and Welfare estimated that 50% of high school graduates and 30% of college graduates quit their jobs within three years of leaving school. The downside is permanently shrunken income and prospects. These trends have led to an ironic moniker for the freeter lifestyle: dame-ren (no good people). The dame-ren get by on odd jobs, low-cost living and drastically diminished expectations.” DailyFinance.com (August 6th). Needless to say, the situation is vastly worse in 2010. This societal polarization and disenfranchisement is like a slow rusting process, eating away at a society that once was thought of powerful and unstoppable… literally built with steel. But then rust loves steel, doesn’t it? So if we don’t figure out how to get Americans back to work, how to build a viable future with educated citizens… are we next?

I’m Peter Dekom looking at a Congress that no longer knows how to lead… only to follow the latest popular political fade, regardless of the consequences.

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