July, in the northern hemisphere, is the time for summer vacation and fun at the beach. The financial markets certainly appeared to be on vacation this week and there is not much worth reporting. So, I wanted to use this post to point out the effect of QE on GDP, its effectiveness and future central bank course of action aka “taper”. Take a look at the chart below that shows created “Federal reserves”(money) as part of the overall GDP figure.
As you can see, nominal GDP has certainly been increased by the current excess reserves of $2 + trillion, roughly %13 of the entire economy. However, if we assume that the Fed will taper and at some point even exit QE, then these 13% of the economy will be removed. If that were to happen today, GDP would be lower than it was pre-crisis in 2008 indicating that the US economy has not grown at all since 2008, even at zero per cent interest rates.
The point I am trying to make is that the artificial stimulus by the central bank is comparable to “make up” and at some point reality will reappear. If the Fed chooses to taper and return to sound monetary policy we would certainly find “the economy in the tank” as Bernanke recently warned. http://www.forextv.com/forex-news-story/bernanke-if-we-were-to-tighten-rates-the-economy-would-tank . However, if the Fed continues to print ever more dollars we will at some point find ourselves in a full-blown debt/currency crisis….. Time to take a swim.
On a lighter note, Peter Schiff combined economics and stand up comedy in a NY club last weekend and he managed to bring his points across rather humorously. The last three minutes may not be rated G but he spoke in NY after all…