The Federal Reserve has a so-called "dual mandate" to promote maximum employment and stable prices. In far as they have failed miserably in both areas, various FOMC board members must vigorously defend both the Fed's current policies and ultimately, their very existence. Fed vice chairman Janet Yellen presented the latest defence in Yellen Says Asset-Buying Adds 3 Million Private Jobs (Bloomberg, hat tip Mish).
Policy makers’ November decision to start a second round of purchases of $600 billion in Treasuries “is intended to support economic recovery from an exceptionally deep recession,” the 64-year-old central banker said in a speech today in Denver. “I believe it will be effective in fostering maximum employment and price stability.”
How did the Fed conclude that all these imaginary jobs will be created? It turns out that we've already got 1.8 million of them. Additional Fed purchases of Treasuries will create 1.2 million more jobs by the end of 2012—
In her assessment of the economic impact of the purchases, Yellen cited a paper by four Fed economists that relied on the central bank’s main economic forecast model, known as FRB/US.
The simulation assumed the latest round of purchases is completed in a year, and that an elevated level of holdings is maintained for two years before being “unwound linearly over the following five years.”
It concludes that private employment is currently 1.8 million higher than it would be without the purchases, and will get an additional boost of 1.2 million by 2012.
Thus we are supposed to believe Yellen because the Fed's FRB/US economic model says so. Can we find the 1.8 million jobs that Fed mortgage-backed security (MBS) and Treasuries purchases have already created or saved? No, we can't—they are invisible. Here is the Non-Farm Payroll (NFP) data from Table B-1 from the Bureau of Labor Statistics. NFP data reflects private-sector jobs.
- 130,448,000 NFP jobs in December, 2009
- 130,712,000 NFP jobs in December, 2010 (subject to revision)
- 128,912,000 NFP jobs in December, 2010 ( had the Fed not taken action)
Given that a measly 264,000 jobs have been added to private payrolls since December, 2009, we are left to conclude that the other 1,536,000 jobs created (or saved) by Fed asset purchases were all created (or saved) during 2009 prior to December. That's certainly possible because anything's possible when you're writing fiction with your economic models. Garbage In, Garbage Out. And you can be sure that if some jobs were saved by Fed MBS purchases, most of them were on Wall Street.
And now we're supposed to get another 1.2 million imaginary jobs by the end of 2012. Pragmatic Capitalism's Cullen Roche breaks down the new jobs estimate in Yellen: QE2 Is Working (But I Can't Prove it)—
Unfortunately, Yellen appears to be waving the team flag and nothing more when considering the positive effects of QE. Her comments can be easily refuted by looking at the facts.
- She says QE is positively influencing the consumer’s cost of credit. That’s obviously nonsense. Mortgage debt now accounts for 75% of consumer credit and the average mortgage rate has risen to 5.2% from 4.2% in September. The average mortgage payer has no perception of expected inflation rates. With more than a quarter worth of loan data now in the books since the inception of QE the facts speak for themselves. Loans are not increasing so QE2 is obviously not generating a surge in borrowing due to the “reduced cost of credit”:
- The wealth effect is obviously the mechanism the Fed is targeting here. The effects are highly debatable. Karl Case and Robert Shiller claim there is no impact from the equity market wealth effect. Either way, I believe this is a dangerous strategy. Nominal wealth creation via asset inflation is a very dangerous economic strategy. We should all understand this following the tech bubble and the real estate bubble. Asset markets that are intentionally diverged from their underlying fundamentals create a dangerous disequilibrium. The Fed should be targeting real underlying fundamentals as opposed to creating asset price inflation that most likely leads to irrational exuberance and eventual nominal wealth destruction. So, the positive impacts are highly controversial here, but I would argue that the final impact of the Bernanke Put will not result in a happy ending.
- Yellen claims foreign exchange impacts can impact trade, however, the change in the value of the trade weighted dollar is practically negligible since QE2 was initiated so this is obviously not driving economic growth.
That may be more information than many of you need, but the bottom line says that not only are the 1.8 million jobs already created invisible, but the 1.2 million jobs to come appear to be imaginary. See my recent post Job Prospects In The Bubble Economy if you feel the need to preserve your sanity just now.
It's long past the time when our owners leaders should have been straight with us. Obviously, we can not depend on the people that ran the American economy into the ground to fix it for us. But I want you to notice that instead of seeing genuine concern from people like Yellen about the sorry state of jobs creation in this country, we get dishonest, cover-your-ass improbabilities based on rigged economic models.
One might have thought we deserved better.