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Friday, March 14, 2014

How Has QE Fared?

DoubleLine Funds' Jeff Gundlach doesn't expect the Federal Reserve to unwind its quantitative easing (QE) program without doing some damage to the markets and the economy. 
But if the Fed can pull it off, he thinks it could go down as one of the greatest discoveries of our time. He said it would be likened to Samuel Morse's telegraph, which he argued was one of the most important inventions of all-time. ["What hath God wrought?" was the first message sent out by Morse on his telegraph.]

In a new presentation, Gundlach reminded us that QE has made the Fed by far the largest single holder of U.S. debt in the world. It's also currently responsible for 70% of the purchases of Treasury and agency securities.

It'll be a little while before we know if the QE-unwind dodged all of the downside risks. Like most, Gundlach believes the Fed will continue to actively keep rates low even as it tapers its current QE purchases.

There are, however, signs that QE hasn't been as successful as hoped. GDP growth continues to be low in the U.S. Real total household wealth has stagnated and real median household income has actually been declining. Meanwhile, the income share of the top 5% continues to grow, reflecting the worsening inequality problem in the America.
 The article has a large number of charts from Gundlach's presentation which are worth reviewing.

The wage issue is interesting to me. Wages, as a percentage of GDP, are near an all time low--especially compared to the 1950's and 60's when wages were 50% or more of GDP. Also, the charts show through several different metrics the collapsing wealth and prosperity of the middle class.

Now, I will say that I think that wage disparity is a problem. I agree with Ann Coulter that the essentially unrestricted immigration of unskilled or semi-skilled workers has eroded wages at the bottom end of the scale. (At the same time, it has placed an extraordinary strain on social services). I think something similar has occurred at the mid-level as well--particularly in the tech sector--as companies bring foreign programmers and engineers, etc., into a market that cannot absorb the graduates that already come from U.S. colleges and universities. Neither party is interested in fixing this--the Democrats want the votes, and both the Democrats and Republicans want the cheap labor.

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