Tyndall Monthly Commentary: Bernanke and QE

As we write, market participants are fretting over just what Federal Reserve Chairman Bernanke said, or indeed meant to say, in his appearance before the US Senate’s Joint Economic Committee.  According to our reading of the event, there was little that was particularly new in his assessment of the economy but we do wonder if even the arch-money-printer himself, Mr Bernanke, is beginning to lose his faith in what can really be achieved through Quantitative Easing policies.

With regard to the state of the economy itself, it is clear that the US remains beset by a number of headwinds, most notably the weak world trade situation, the very soft household income trends (at least for the median household) and the effects of the fiscal tightening, but nevertheless it remains the case that the US is still managing to produce around a 4% nominal growth rate on a remarkably consistent basis.  Moreover, given that inflation in general is likely to be lower this year than it was last year, this situation would seem to suggest that the economy will once again produce round about its usual 2% real growth in 2013.  The economic data has clearly seen good and bad months over the last few years but in general the economy seems to have clung to a remarkably stable trend since the end of the crisis phase of the GFC.

We continue, though, to doubt that much of this realised economic growth (outside some of the spending by the very top income deciles of the population) will be overly due to the Fed’s Quantitative Easing policy effect, which now seems only to be succeeding in financing a selling of bonds by investors and companies so that they can buy (primarily) domestic risk assets.  Admittedly, we have yet to gain the full first quarter flow of funds report for the US but we feel quite confident in our view that the processes that QE3 and its counterparts elsewhere have created and sponsored are having little or no impact on the real economy but that they are creating a “financing bubble” in the bond markets.