Economics Briefing Gnostam Monthly Economics Briefing

May 2013

The impact of the end of QE3

Europe Battles Long-term Challenges

Europe’s  debt  crisis  is  far  from  over,  with  severe  austerity  measures  undermining  growth  prospects  well  beyond  mid-­‐decade.      A  number  of  debt-­‐heavy  na<ons,  locked  in  recession,  are  experiencing  substan<al  social  and  poli<cal  fallout  from  sky-­‐high  youth  unemployment  rates.  

QE is ending worldwide �  Recovery in housing is driving this;

�  Gold price down, but at $1,300/oz is still half of value in real terms i=of 1980’s peak;

�  Cash out of in I-shares SPDR Gold trust, means real economy has more potential for real returns, [280 T increase 2012, 177T decrease in Q1 2013];

�  Industrials in US increase profits, have great balance sheets, but growth in sales is a problem, >1%.....

A lot of QE benefit swallowed up Gap between mortgage rate paid by homeowner,

and yield on mortgage bond

Source: http://www.newyorkfed.org/research/conference/2012/mortgage/primsecsprd_frbny.pdf

Does QE cause inflation? Printing money causes inflation only if the money

is lent & spent …

6.50

6.70

6.90

7.10

7.30

7.50

7.70

7.90

2008 2009 2010 2011 2012

$trn

0.0

0.5

1.0

1.5

2.0

2.5

3.0Money supply(right axis)

Bank credit (left axis)

Source: Gregory Ip, Economist. Shows the extent of bank solvency problem!

… or if expected inflation rises

-1.5-1.0-0.50.00.51.01.52.02.53.03.5

2008 2009 2010 2011 2012

Expected inflation

Real bond yield

Source Gregory Ip, Economist

Conclusion �  Democracies in advanced are addicted to nominal

growth, not real growth!

�  Money supply has bought time for the adjustment in living standards;

�  Now it is up to developed world to create real economy wealth, and that is very difficult in today’s economic environment;

�  Banks role at center of developed economies will have to change [= regulated], as have not been able to fund growth, just asset bubble lending.