The Bernanke Playbook in action. Since 2008, the Fed has purchased approximately $1.7 Trillion in U.S. Government Debt as well as $1.7 Trillion in mortgage-backed securities. As the Fed bought bonds, interest rates quickly fell across the yield curve. The overnight lending rate, the Fed Funds rate was anchored near 0% and the Fed bought debt to bring down 5 and 10-year treasury yields to the lowest levels on record. These record low interest rates have support the stock market, which is at or near record highs.
The Bernanke Playbook
Quantitative Easing & "Helicopter Money"
The famous "Helicopter Money" speech made by Governor Ben Bernanke, before the National Economists Club, in Washington, D.C. on November 21, 2002. This was Bernanke's first public speech as a Fed Governor. To create this line-by-line review, I transcribed each word of this speech into Excel. To emphasize a point, I used formatting techniques such as underline bold and italics and color.
The declarative phrase "Whatever It Takes" has been appearing more lately. Mario Draghi, President of the European Central Bank has often said that he would do "whatever it takes" to preserve stability in Europe.
Deflation Defined
The Federal Funds Rate hit 0% in November 2008 and remained at 0% until December 2015. Now the official target range is 0.25% to 0.50%
Here is one justification for the Fed to step in Fix Student Loans
Since 2008, the Federal Reserve Balance Sheet has expanded to over $4 trillion dollars as the Fed has purchased over $1.7 trillion in U.S. Government debt as well as over $1.7 trillion in mortgage-backed securities. Sources: Federal Reserve, Bloomberg, Wikipedia
In response to the Housing Bubble and the ensuing Financial Crisis, the Fed deployed the first Quantitative Easing program (which we now call "QE1") with over $1 trillion dollars of liquidity. I accept the argument that QE1 was critical in saving the global economy from collapse in 2008/2009. However, the Fed's decision to proceed with QE2 and QE3 remains highly controversial.
The S&P 500 is trading back to all-time highs, but has recently endured several 10% market corrections. The Fed initiated #lift-off in December 2015 but the Economy never made it past escape velocity.
As shown in the chart below, (in the aggregate) U.S. Consumers have never been richer. Net worth bottomed at $54 trillion in Q1 2009 and has since exploded +83% to $89 trillion. From peak to peak, U.S. Consumer Net Worth has increased by 33% from the $67 trillion achieved before the Housing Bubble broke. Source: Federal Reserve and Bloomberg
Here is the Rub. Despite 7 years of Quantitative Easing and nearly $4 Trillion dollars of Fed Monetary Policy, there appears to be no change to U.S. economic growth trends.
As illustrated in this chart (presented by ISI and inspired by Jim Grant), American consumers have never been richer (on paper), and yet, there has been no improvement in economic growth trends.
Excessive monetary accommodation was designed to create asset price inflation. The U.S. Housing market languished for several years. Now the Case-Shiller Index of 20 Cities is within 6% of its matching its previous all-time high set in 2006.
Source: Bloomberg
The U.S. Housing Home Ownership Rate has been falling fast. Ironically, despite steady home price appreciation since 2009, Home Ownership Rate has fallen from the 69% peak achieved in 2004.
Source: Bloomberg
And correspondingly, U.S. Apartment Vacancy Rates have hit generational lows at below 7%
Source: Bloomberg, U.S. Census Bureau
Reis is a data provider for the Commercial Real Estate industry. Since 2009, the average rent in the U.S. Metro area has increased by 25% from $964 per month to $1,200.
Source: REIS Inc and Bloomberg
This is called the "5 Year 5 Year" and it is the markets collective bet on the Projected 5-Year inflation rate, five years from now.
"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress." - Ben Bernanke
We need a new plan
On a recent CNBC Interview, even the Maestro acknowledged: "There is only so much that monetary policy can do" - Alan Greenspan
There are two deflationary forces in the Economy today
Millennials: Too much expensive student debt, and not enough income
Retirees: Robbed of ability to live on traditional savings
(In this environment, we value the certainty of income so high . . . think about the perceived loss of wealth when Retirees can no longer save at a reasonable interest rate)