Streetwise Professor

July 30, 2011

QE Blew

Filed under: Economics,Politics — The Professor @ 7:45 pm

The most recent GDP numbers were dismal.  The Q1 2011 growth rate was revised downwards from an anemic 1.9 percent to a virtually invisible .4 percent.  Q2 growth was a measly 1.3 percent.

This creeping growth coincided with the Fed’s most recent “quantitative easing” episode–QE2.  QE2 was predicated on a variant of Phillips Curve reasoning.  Bernanke and the Fed were concerned that the economy was lurching into a deflationary episode, and wanted to “re-anchor” inflationary expectations upwards in the belief that this would spur spending and growth.  Hence the operation to monetize huge amounts of debt.

Note that QE2 evidently had the desired effect on inflation.  The price indices for gross domestic purchases rose 4 percent in the first quarter, and 3.2 percent in the second.  Core inflation was 2.6 percent in the first quarter and 2.4 in the second–both well above the Fed’s 2 percent “tolerance” zone.

One very reasonable interpretation of all this is that the Phillips Curve is bunk: there is no tradeoff between inflation and growth.  Like we didn’t know that before.

But no tradeoff doesn’t explain the paltry growth, especially at this phase of the alleged recovery.  One highly plausible explanation is that the combination of regulatory onslaught and a burgeoning debt overhang is a drag on the economy.

If there is in fact a Phillips curve, that would mean that the drag resulting from the metastasizing Federal government is even bigger.

These figures are consistent with an incipient stagflation.  Great news.

The economic performance is definitely not great news for Obama’s re-election prospects.  Hence the palpable desperation in the attempts of the administration and its acolytes (including vast swathes of the media) to put the blame somewhere else, anywhere else.  Some of these efforts are same old-same old Blame Bush, or the Japanese earthquake, or the weather.  Seriously.  But some of the efforts are truly novel, and involve violations of the laws of nature.  Specifically, some have endeavored to pin the economy’s somnolent performance in January to June on Republican intransigence on the debt ceiling in July.

Quite a trick.  Note to class: cause must proceed effect.

But there is a link between the economy’s stall and the dynamics of the debt ceiling debate.  The stall is politically fraught for Obama and the Democrats in November, 2012.  There is likely nothing that they can do to rejuvenate the economy in the next 15 months.  Indeed, with this lot, anything they’re likely to try would make things worse.  So not being able to change the substance, the only alternative is to shift the blame.  And precipitating a crisis over the debt ceiling is one way of throwing a lot of dirt in the air, changing the subject, and creating an alternative narrative with a different villain.

It’s a high risk strategy, but desperate times call for desperate measures.  And based on objective measures–including plummeting popularity and foreign policy fiascoes as well as a sick economy–Obama’s situation is desperate.

Which all bodes ill for compromise, the New Civility–and the economy.

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  1. I bet quite a bit on a Republican win in 2012. So in this narrow sense things are looking good.

    On the other hand, it would be a disaster for the US.

    Comment by Sublime Oblivion — July 30, 2011 @ 11:03 pm

  2. “Indeed, with this lot, anything they’re likely to try would make things worse.”
    Even NPR, which drips with socialistic entitlement ideals on their daily panels, remarks about how this is the worst national leadership, across the board, in the last century. There is no oil in the engine, so naturally the mechanism (federal government) has seized up. In reality, when your auto stops working for you: you trash it. Somehow we are blessed with elected officials who do not operate within the realm of global and fiscal realities, and a populous which is largely too blind to send the busted auto to the dump.

    Comment by Jonathan — July 31, 2011 @ 2:55 am

  3. I’m personally neither surprised nor dismayed that QE2 failed. While I was not in favor of the scheme, Obama and is minions were empowered to enact their solutions to the nation’s problems and they should be allowed to enact their schemes, including QE2. We now know their schemes have failed and we, as voters, have ample evidence that those in policy positions have failed the nation. We need to allow our elected officials to try and, if they fail, to try again with the insight gained from past efforts. I am not so concerned that they tried QE2 and failed as I am at the fact that they are even allowing discussion of QE3.

    Comment by Charles — July 31, 2011 @ 8:47 am

  4. @Charles–It stuns me that so few have pointed out how badly the Q1 and Q2 GDP numbers discredit QE2. It stuns me even more that I have read in several places that the inflation numbers make it unlikely that the Fed will try QE3. Yeah, we are getting inflation, but no growth–score one for bad, zero for good. So why would anybody even think QE3 could possibly be a good idea?

    But re your broader point, it seems that you are adopting a Leninist “the worse, the better” line. I’d tend to agree, if I was more confident that enough people could connect the cause and effect, and vote accordingly. And if I were more confident that those whom they vote for won’t go native when they get to DC.

    The ProfessorComment by The Professor — July 31, 2011 @ 10:06 am

  5. Most of the slowdown should be attributed to less government spending at the state and local level. The cuts in state budgets have had the largest impact in economic performance this year. QE2 may have increased inflation but an inflation rate of 2.6% or 2.4% is still low. I think higher inflation would help the economy at this point and is nothing to be feared.

    Comment by twg — July 31, 2011 @ 3:27 pm

  6. SWP, did TurboTax Timmy have the globalist Blackwater of the Internet take out your page yesterday? SWP was down for 24 hours, denying me my customary chance to tease the web’s Russophobic lunatics. And to warn you that the globalist corporatists who overthrow governments and launch useless wars are watching the Tea Partyers with legislation like this:

    Don’t make fun of TurboTax Timmy, he’s a Ford Foundation ‘made’ man, as they used to say in the Mob. Which means he ain’t workin’, it’s money for nothin’ and chicks for spooktastic free.

    Comment by Mr. X — July 31, 2011 @ 6:31 pm

  7. @Mr. X–I only wish that I could claim the honor of being targeted by Timmy!’s hacker brigade. Alas, my hosting service was switching servers (w/o bothering to tell me, btw). Interestingly, I could access the site via some machines–e.g., from my office machine which I accessed via Gotomypc–but not my home machines where I do most of the blogging. My tech guy told me that “new visitors or people who only visit once a day or so should see the site without issue” but “frequent users may have problems because their computer has cached the dns entries most likely due to frequent visits to the site.” So I guess that marks you as an SWP junkie, Mr. X!

    I had to clear my cache, close the SWP page, kill my browser, and restart in order to get access again.

    The ProfessorComment by The Professor — July 31, 2011 @ 7:57 pm

  8. And yeah, that new internet bill p*sses me off. That, the food bill, CAFE, and on and on and on.

    The ProfessorComment by The Professor — July 31, 2011 @ 7:58 pm

  9. Then don’t believe everything Soros protege Misha the Tie Eater’s propaganda ministry puts out. And what, D.C.’s gonna say he’s full of crap? Of course not, even if Mike McFaul thinks the telephoning the EU monitors blunder was the false flag. Hell, the SS Viking wannabe in Norway trained in Belarus and seemed far more deadly competent than the alleged Russian operatives. Funny how our media’s staying silent on that score, maybe because Belarus is alternately the last dictatorship in Europe or yet another victim of Russian energy imperialism, depending on what day of the week it is and the amount of smoke Lukashenko is blowing up the IMF/EMF’s a$$ this week.

    Peace out.

    Comment by Mr. X — August 1, 2011 @ 12:55 am

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