On Apr. 30, the Fed
announced a further reduction of monthly asset purchases by $10 billion to $45
billion, further reducing the scope of QE3.
The press lauded the reduction as a show of faith by the Fed in the U.S.
economy despite a “dismal” reading on first quarter economic growth. The Fed concluded its 2-day policy meeting with
the prediction that the economy “will expand at a moderate pace and labor
market conditions will continue to improve gradually.”
QE was beneficial for banks
and large corporations but did nothing to help small businesses and the middle
class. Jobs and wage growth were
stagnant for most of the last five years while the middle class did its best to
muddle through under conditions that could only be described as
contractionary. QE was a boon for equity
prices but actually hindered the middle class by slowing wage and lending
growth.
Since the Fed began scaling
back the size of its monthly asset purchases earlier this year, commercial
lending has increased. As economist
David Malpass recently pointed out, “Growth was weak in 2009-13 but jumped to a
16% annual rate in the first quarter, when the taper started.” The Fed plans to gradually diminish its
monthly asset purchases until finally ending them in 2015, just as the new
long-term inflation cycle will kick off.
The end of QE will coincide with the commencement of a new 60-year
cycle. Assuming the Fed sticks to its
stated intention, there will be little counter-cyclical interference with the
new long-term cycle (unlike the one that’s ending this year). That means there will be more opportunity for
the cycle to play out and extend its benefits throughout the broad economy, not
just the financial sector.
I’ve
included the following graph which was originally printed in the late P.Q.
Wall’s newsletter. This graphic depicts
the various “seasons” of the long-term 60-year cycle as it pertains to the
phases of the economy. It also shows the
basic divisions and sub-divisions of the inflation/deflation cycle. We’re currently approaching the end of
“winter” and will soon be entering “spring.”
The
following graph illustrates in greater detail the phases of the long-term
cycle. Again it is from one of P.Q.
Wall’s old newsletters. This graph is a
good representation of the the 60-year cycle and its four 15-year phases. P.Q.’s prediction that interest rates would
bottom out in 2013, which he initially made back in the 1990s, was remarkably
prescient.
