Poll Shows Why QE Has Been Ineffective

I have discussed many times in the past the Fed’s ongoing Quantitative Easing (QE) programs and their ineffectiveness of generating “self-sustaining” economic growth.  While the Fed’s interventions have certainly bolstered asset prices by driving a “carry trade,” these programs do not address the central issue necessary in a consumer driven economy which is “employment.”  

In an economy that is nearly 70% driven by consumption, production comes first in the economic order.  Without a job, through which an individual produces a good or service in exchange for payment, there is no income to consume with.  While income can come from social welfare, as seen in the latest personal income data, these dollars are derived from the production of others through taxation. 

Like any common accounting equation, if taxation is increased on one side of the ledger, the offset is lower consumption, and ultimately economic growth, on the other.  This is why the multiplier from government spending, and social welfare, is effectively near zero, if not potentially a negative.

The problem with the Federal Reserve’s ongoing QE program is that the inflation of asset prices, the “wealth effect,” has not impacted much of the overall economy.  A recentBloomberg National Poll found:

“More than three-quarters of Americans say the five-year bull market in U.S. stocks has had little or no effect on their financial well-being.”

This is not surprising when you look at the statistics of how wealth is divided in the domestic economy today.  The video below, based on a Harvard Business School study, shows the wealth distribution in America.

Here is the key graphic:

When you consider that the lower 80% have less than one years savings set aside for retirement it is not surprising that:

“Seventy-seven percent of respondents dismissed the 176 percent rise in the Standard & Poor’s 500 Index (SPX) since its March 9, 2009 financial crisis low, according to the poll, taken March 7-10. Barely one in five — 21 percent — said the market’s gains have made them ‘feel more financially’ secure.”