The latest from Richard Koo has two really interesting points. The first is the fact that QE has failed to boost the UK economy (shocking since its transmission mechanism is non-existent!) and the second is his opinion that the USA is entering a slowdown (not sure what that means precisely since we’ve basically been in one long stall for years). On UK QE he says:
“Bank of England governor Mervyn King, a supporter of the Cameron government’s fiscal consolidation drive, launched a bold program of quantitative easing in mid-2011 that can be called a British version of the Fed’s QE2. But the easing failed to prevent the recession.
The program’s failure was only to be expected. With both the private and public sectors borrowing less during a balance sheet recession, the money multiplier turns negative at the margin, causing any liquidity supplied by the central bank to stay within the banking system and preventing growth in the money supply.
The UK money supply has increased only marginally even though the BOE has expanded the nation’s monetary base by 45% in just half a year under this program (Figure 2).
What I find difficult to understand is why Mr King would support fiscal austerity at a time when both businesses and households are paying down debt and increasing savings despite near-zero interest rates—in other words, when government borrowing and spending is the only way to expand the money supply.”
To be expected really. QE has been the world’s greatest non-event as I described several years ago. With the credit system clogged up there is just no way for QE to impact the economy.
On the USA slowdown he says:
“Recent data suggest the US economy is also decelerating. In my view, this is more a case of a basically weak economy returning to normal following a temporary boost from unseasonably warm winter weather.
The official US unemployment rate dropped to 8.1% in April. The main cause of the decline was the record low labor force participation rate, indicating that large numbers of people have given up looking for work and dropped out of the labor force. That is hardly good news.
Fed Chairman Ben Bernanke touched on the subject of the labor force participation rate at his press conference after the FOMC meeting on 25 April. Mr Bernanke indicated that an aging population means the participation rate is naturally trending lower but said the sharp recent decline was largely a cyclical development attributable to economic weakness.
He also said the unemployment rate no longer necessarily coincided with economic developments, noting a stronger economy could prompt people who had abandoned their job searches to return to the labor force, pushing the unemployment rate higher.”
However, I think this was partly an attempt to justify the fact that the actual unemployment rate has been far lower than Fed forecasts suggested.”
I still don’t see it. We’ve basically been in one long stall phase for years now. The budget deficit in the USA has helped bolster growth enormously. But perhaps more importantly, we’re beginning to see credit come back. This is where the USA and UK really diverge. The UK is still experiencing very weak borrowing trends while balance sheets in the USA have sprung back to life much more quickly. I’ve referred to the USA as “Japan on fast forward”. Koo has expressed his displeasure with this opinion, but I think the evidence is clearly pointing to improving borrowing trends and the balance sheet recession in the USA ending sooner rather than later. Of course, that’s all assuming the government doesn’t torpedo this tepid recovery with austerity in the coming 12 months…..
Source: Nomura Securities