The QEII Has Set Sail

"Clueless." That's what the Germans called the United States because Ben Bernanke and the Federal Reserve Board announced that they are going to embark on another round of quantitative easing (dubbed QEII).

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Dr. Bernanke remarked in a separate article that this is a monetary tool and not just a theoretical swag (my word, not his). Who's right? Well, it really is just another monetary tool, but it is, indeed, dangerous in certain respects.

Quantitative easing refers to a monetary policy that is used when a central bank has already pushed its target interest rate to zero but wants to stimulate the economy further, and does so by purchasing government and corporate bonds or other assets with newly created money. It is not all that different from normal Fed open market operations (purchasing short-term Treasuries to manipulate interest rates), except that because interest rates are already at rock bottom, any stimulatory effect comes purely from the sheer quantity of new money injected into the banks.

Did you note that we said the stimulatory effect comes from injecting new money into banks? This supposes that the problem is a lack of liquidity at banks and that a lack of cash is why they are not making loans. We hate to argue with the Fed (you never win that one), but banks are holding excess capital reserves right now of about one trillion dollars. One would have to wonder if another $600 billion will push the first $1 trillion out the door any faster.

For business leaders, the result of QEII is that it will not have much of an impact on boosting economic growth. Bank of America seems to have a better plan. They are planning on hiring 1,000 people in 2011 whose job it will be to lend money to firms with annual revenues of less than $3 million. That is the private sector making money in the private sector, and it should make a difference.

Industry News

Selling into Defense Capital Goods New Orders can work if you are a niche seller or if you use defense selling to augment your main line of activity. Spending on an annual basis has declined to $119.1 billion, which is 1.5 percent below this time last year. Capital spending on defense goods is increasingly viewed as a target for spending cuts as federal deficit pressures rise. A larger, negative, year-over-year comparison is anticipated for 2011.

Readers selling into the Civilian Aircraft Production market should be prepared for the recession in this industry to end in the near term. Production is far from encouraging, at 8.7 percent below the year-earlier level, but our analysis suggests we will see Production improve into the high single-digits rate of recovery in 2011.

The news is not as encouraging for Medical Equipment & Supplies Production. Production is currently up 1.6 percent from last year, but this market is heading into recession for the first half of 2011. The declining trend will not be steep, but it does mean diminishing opportunities until later in 2011. Look for 2011 to come in essentially flat with 2010.

Make Your Move

We are at a critical phase of the business cycle in that opportunities are upon us even as uncertainty keeps too many companies moribund. Look at the leading indicators we look at and you'll see that the United States, Canada, Mexico, Europe, South America and Asia are all going to experience more economic expansion in 2011. It will be tepid, but it represents a real opportunity to gain market share.

Alan Beaulieu, alan@itreconomics.com, is President of the Institute for Trend Research, in Boscawen, N.H. His book, "Make Your Move," is available at www.itreconomics.com. His Internet radio show is live from 1 p.m. to 2 p.m. Pacific time on Mondays at www.voiceamerica.com.

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