The US Economy: Does Money Grow on Trees – Part 1

What happens after the US Federal Reserve ends quantitative easing? How will it impact on the US economy and in turn, on markets around the world? Join CNBC Africa Anchor Lindsay Williams in his quest to find out where the US economy is headed, as he chats to leading US and local economists, authors as well as SA Reserve Bank Governor Gill Marcus.

Proudly brought to you by investment solutions with confidence hmm i’m in new york city on a beautiful summer’s morning i’m in central park which is arguably the most loved most used and most cosmopolitan piece of public urban space in the world is 836 acres 250 are lawns 150 east underwater ponds lakes etc and there’s 80 acres of woodlands the locals i speak to

Say that central park has never been in such fine shape which is in sharp contrast to the state of the us economy the us economy is nothing new to say that it’s running twin deficits the budget deficit and the current account deficit and what about the 17 trillion of national public debt it’s almost 17 trillion anyway it doesn’t matter what’s a trillion here and

There between friends and the u.s federal reserve or the u.s federal reserve has a massively expanding balance sheet a balance sheet that is laden with the debt of its own country does it all matter while the us is the world’s biggest economy and while it controls the printing presses probably not but we’re going to find out in november 2008 just a few months after

The collapse of lehman brothers the u.s federal reserve introduced qe1 the first in what became a series of quantitative easing programs it involved the fed spending 100 billion us dollars per month to purchase mortgage-backed securities it lasted 17 months with a total spend of 1.7 trillion u.s dollars in november 2010 the fed introduced qe2 which lasted seven

Months with 85 billion us dollars spent on u.s treasuries per month a year after qe2 concluded the fed went even further by introducing yes you’ve guessed it qe3 in a move seen by many as controversial this program included a clause stating that a further purchasing of mortgage-backed securities and treasuries would go indefinitely with no limit to purchases

The degree of spending remains static at 85 billion us dollars per month quantitative easing ran in tandem with operation twist and quite aptly named this introduced a different dynamic short-term treasuries were sold by the fed the proceeds of which were used to buy up longer-term securities in january 2013 changes were made to qe3 structure evolving it into

What’s now commonly referred to as qe4 operation twist had come to an end by this time the fed was to target the unemployment rate directly qe4 would continue until this rate fell below six and a half percent or until core inflation rose to two and a half percent over the next hour we’re going to talk to business leaders to economists to traders to ex-traders

To academics maybe try and find a politician or two who knows but we’re going to try and find out if money grows on trees in central park as you can see quite a lot of trees in fact there’s 24 000 of them 1700 of them are american elms and they’re looking particularly fantastic at this time of year but there’s no money trees they’re elsewhere let’s find out if

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Money really does grow on trees a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity trying to understand quantitative

Easing seems simple enough on the surface but scratch a little deeper and you’ll find a slew of different opinions with some for it some against it and some who just sit on the fence lewis alexander most recently at the u.s treasury department where he was counsellor to the secretary of the treasury and a few years earlier worked as a senior economist at the

Board of governors of the u.s federal reserve and at the u.s department of commerce he’s currently the chief economist at namura we begin our search for the big truth on quantitative easing at his offices in new york lewis there’s quite a few misconceptions about quantitative easing qe as it’s called is it really the printing of money no i wouldn’t say it is

Actually it’s purchasing assets and that has the effect of creating excess reserves on bank balance sheets and in some ways of accounting for it that is a form of money but it i don’t believe it’s generating inflation i think it’s primarily acting through the risk appetite of private investors effectively what you’re doing is you’re taking risky assets out of

Private portfolios and replacing them with safe liquid assets the natural response of investors on the other side in response to that is going to be go out and demand other risky assets and that will have the effect of stimulating the economy i do not think of it as primarily printing money of course everyone with even a hint of interest in the us economy has a

View albeit controversial at times on the fed’s policies lee adler founder and publisher of the wall street examiner says it’s all about looking at the data blocking out what the pundits say and finding out the facts tell me about quantitative easing tell me about printing money and tell me about money growing on trees what’s it all about well all of the central

Banks are moving in the same direction at the same time they’re dealing with the same banks the same clients all over the world they are pushing policy in a direction that they’ve never gone before where they’re focusing on the direction of equities uh rather than the money markets themselves and uh when you look at for example the the 21 primary dealers that deal

With the fed uh only seven of them are us banks seven are european banks four i believe are canadian banks three are japanese banks and they’re the same banks that are dealing with the ecb and the bank of japan and the fed so it’s all one liquidity pool the the central banks are pumping liquidity into these institutions and they decide where it’s going to go

Is it going to go into japan is it going to go into the u.s treasury market is it going to go into europe is it going to go into commodities or is it going to go into u.s equities and i think the answer is that the central banks are pushing in particular ben bernanke is pushing them to go into u.s equities that’s where he wants it to go who are these primary

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Dealers primary dealers are those very special banks and and dealers that are selected by the federal reserve to transact trades with the fed the fed conducts monetary policy by trading with these 21 dealers that have to meet certain criteria and they include goldman sachs and jpm and associated general and bmp paraban and mizuho and daiwa and rbc the world

Bank of canada rbs scotland all of these banks are worldwide organizations they are operating in all markets and as i said only seven of them are u.s banks so when fed policy goes out it goes out to the entire world not just to the u.s market by the same token the ecb when it conducts business with the banks that it deals with and when the boj pumps money into

Its system it’s going into the same banks they decide where they’re going to put that capital blackstone advisory vice chairman byron wein notoriously releases his list of top 10 predictions for the u.s each year his 2013 list included these two predictions pertaining to the u.s economy a profit margin squeeze and limited revenue growth caused 2013 earnings for

The standard and poor’s 500 to decline below 100 disappointing investors the s p 500 trades below 1300 companies complain of limited pricing power in a slow highly competitive world economic environment financial stocks have a rough time reversing the gains of 2012 intense competition in commercial and investment banking together with low trading volumes puts

Pressure on profits layoffs continue and compensation erodes further regulation increases and lawsuits persist as an industry burden is mr bernanke giving us short-term stability but sacrificing future stability in other words is he creating something that is going to create even more volatility for us in the future both market wise and economy wise there are a

Lot of people who think that i’m not so sure that’s right because after all the the kinds of things that you would expect to happen as a result of such vigorous expansion of monetary policy aren’t happening we don’t see any evidence of inflation why because inflation is ordinarily driven by house prices and labor rates houses are going up modestly house prices

And labor isn’t going up at all average hourly earnings are hardly budging so we don’t see any inflationary effects so everybody all the critics of bernanke are saying oh just wait you know we’re going to have a serious inflation problem maybe maybe not he’s been doing it for a long time now and we don’t see any evidence of inflation so i’m a little skeptical i

I can’t help but think that all this monetary expansion is going to end badly but we don’t see any early warning signs yet peter schiff an american investment broker author and financial commentator saw the housing bubble coming way before it burst our economy rests on the foundation of the housing market and it’s a very weak foundation the housing market today

Is very similar to the internet market of the late 1990s and look it’s not going to last much longer at some point the lenders are going to bulk the interest rates are going to keep on rising as more and more housing supply comes on the market eventually at some point the bubble’s going to break and now he’s predicting a worse financial crisis than that of 2008.

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Peter let’s go back to 2006. i was watching you on cnbc you were chatting to the presenter and also to some rather bombastic and arrogant person in another part of america and you were putting forward the idea that in 2006 the us was facing a housing bubble and this gentleman literally laughed you off the set almost but of course then what happened was there was

The housing bubble it did burst and then along came ultra monetary policy easing and also quantitative easing and now everything’s fine of course well they think it’s fine you know the same people who are laughing at me back then are still laughing at me when i tell them how much worse this next crisis is going to be because of all that cheap money all the fed

Accomplished with its quantitative easing and all we got from the bailouts was we delayed the pain that crisis should have been a lot worse but it wasn’t because of what the government did and what the federal reserve did but it’s not without consequences because by doing that we actually exacerbated the underlying problems and merely postponed the pain and now

Unfortunately because the problems are bigger we’re going to have a worse crisis coming than the one that we think we solved back in 2008. on the other hand people will say if we hadn’t have done what we have done then things would be even worse right now well i doubt they would still be worse they certainly would have gotten worse at the time but it would have

Been constructive pain because the economy would have been dealing with all the male investments the misallocations of resources that were at the heart of the crisis but the question is why were resources so badly misallocated it was because of the false signal sent to the market by the fed remember the artificial stimulus didn’t start after the financial crisis

That’s what caused it we didn’t have a housing bubble by accident it was the consequence of the monetary policy the fed used to get us out of the 2001 recession they slashed interest rates down to one percent and it was all that cheap money that went into the housing market that financed all the adjustable rate mortgages and subprime we had a phony recovery now

Had the fed not done that the 2001 recession would have been much deeper but we wouldn’t have had the housing bubble and we wouldn’t have the financial crisis of 2008 and we wouldn’t be staring at a far greater economic crisis that’s around the corner coming up we go inside the new york stock exchange and continue our probe into the fed’s qe programs i work in

Wall street i don’t think a lot about morality

Transcribed from video
The US Economy: Does Money Grow on Trees – Part 1 By CNBCAfrica