The President of the Federal Reserve of the United States (FED), in confronting the biggest crisis since the Great Depression of 1929, beginning with November, 2008, left aside two of the three objectives of the Bank, financial stability and price controls, and made the third, full employment, the target of their monetary policy. The programmes of Quantitative Easing introduced, he said, would not be withdrawn until the unemployment rate reached 6.5%. Now, however, the United States has begun to taper the monetary stimulus even as there is no sustained recovery of their GDP nor a lowering of unemployment to 6.5%, and they appear to face risks of deflation and new financial bubbles.

 

The Bureau of Economic Analysis for the past five years forecasts term GDP growth rates that later are substantially reduced. In this way, initial GDP forecasts must be regarded with caution, and growth data must be taken seriously only in the third revision. The first announcement appears to be made to influence expectations and to take decisions on monetary policy. The only problem is that the economic world does the same thing.

 

In September of 2013, the date of the first more accurate estimate of annual GDP growth, they predicted that the year would close with a growth rate of 2.8%, considerably above that observed since 2009. At the third revision in March of 2014 the actual measure was of 1.9% for 2013. The BEA indicated that there was a drop in gross capital formation, private consumption and lower public spending, all of which makes sense in the framework of policies of fiscal austerity. Annual figures for growth from 2009 forward have been –2.8%, 2.5%, 1.8%, 2.8% and 1.9% in 2013. There seems to be no vigorous recovery.

 

The programmes of Quantitative Easing-I that began in November of 2008 to stimulate credit and avoid deflation were maintained until August of 2010. Annual inflation (core inflation) as of May 2010 fell to 0.3%, when Bernanke decided to inject more liquidity in order to generate some monetary inflation. Then he introduced Quantitative Easing-II in November. This produced some change and in August of 2011 inflation stood at 3.1% and signalled the beginning of a decline. Because of this, in September of 2013 a new Quantitative Easing-III began with some 45 billion dollars, increased to 85 billion in December of the same year. For all the monetary stimuli, the evidence indicates that inflation has been diminishing since 2011, at 2.9%; in 2012 it was 1.9% and finally in 2013 at 1.7%.

 

To all of this one must note the weak recovery of the labour market. Unemployment appears to be stuck at 6.7% in February of 2014. The official figures leave aside the fact that in the past five years some 5 million 730 thousand people abandoned the search for work in the face of the structural weakness of the US economy, according to the Economic Policy Institute. If this were included, unemployment would be at least 10%. Special new programmes are being applied to deal with this new unemployment that is off the records. The macroeconomic tendency appears to involve lower wages in order to encourage exports, which neither induces a recovery of gross capital formation, nor a sustained recovery of the rhythm of consumption or production of goods and services to levels seen before the crisis.

 

Compared to March of 2009, the indices of the New York Stock Market, the S&P 500, Dow Jones and Nasdaq have increased by 178, 151 and 242% respectively. The danger is that the Stock Market indices are not sustainable in view of the economic data available.

 

Massive purchases of US Treasury Bills and mortgage assets led to a situation where the balance sheets of the Fed went from one trillion to 4.18 trillion dollars between September of 2008 and March of 2014. Much of this has been reflected as short term capital flows into emerging markets as their yields near cero. The tapering of the stimuli seeks to bring back these flows in order to stimulate growth in the centre at the cost of strangling the emerging world through the fall of stock markets, exchange rate depreciation and lower commodity prices, with the consequent reduction in consumption and economic growth.

 

The global impact of the end of monetary stimulation is tripled when one considers that there is a triple arbitration in money markets, exchange rates and stock prices. Zero interest rates have pushed capital abroad and with these announcements they are coming back home to New York. The profitability in dollars is still low but given the possibility of exchange rate shocks it becomes a refuge. Thus we have the reversal of the triple arbitration. There are some who also  return to Yuans and Euros, both more profitable. At the same time commodity prices fall and this can lead to a fall in consumption in emerging economies.

 

On March 12, 2014, central banks sold 106 billion dollars invested in US Treasury bonds, the biggest weekly fall in history, in order to maintain their exchange rates. One week later Janet Yellen, now the head of the Fed, announced a reduction of monetary stimulus to 55 billion US$ monthly and declared that the end of monetary policy based on low interest rates would happen “much before the moment in which unemployment reached 6.5%”. In order to avoid announcing the unemployment figures, the best option had been to remove it from the criteria for ending monetary stimulus. The outlook for growth in 2014 is not the best and there appears to be a consolidation of a lower growth rate in the world.

(Translated for ALAI by Jordan Bishop)

 

- Oscar Ugarteche is a Peruvian economist who works in the Instituto de Investigaciones Económicas of UNAM, Mexico. Member of SNI/Conacyt Coordinator of the Observatorio Económico de América Latina. (OBELA) www.obela.org and president of ALAI www.alainet.org

- Ariel Noyola Rodríguez is a member of the project OBELA, IIEC-UNAM. Contact: anoyola@iiec.unam.mx.