On Why QE is Working and When is it Likely to End, and Why a High-Carb & Low Fat diet – Part 4!

From Aditya RanaDate: Sat, Mar 30, 2013 at 3:03 PM
Subject: On Why QE is Working and When is it Likely to End, and Why a High-Carb & Low Fat diet – Part 4!

Hi!,

With the U.S. stock market reaching record highs last week, the big question which looms in the horizon is whether the Fed will take it’s foot off the QE pedal too quickly and risk another downturn in the markets and economy. Opinions remain sharply divided on the efficacy (and risks) of the continued QE program deployed by the Fed, so it is helpful to get a detailed inside view on QE from the Fed itself. Bill Dudley, the head of the Federal Reserve Bank of New York (and one of the troika which have led the Fed down the path of unconventional QE – the other two being Bernanke and Yellen), made an important speech (http://www.newyorkfed.org/printable.html) which is one of the clearest expositions of the Fed thinking behind the QE program and what conditions might entail a scaling back of the program. To summarise:

-While the U.S. economic growth slowed to 1.6% in 2012, compared to an average of 2.2% over the previous two years, the underlying fundamentals are gradually improving despite the serious headwinds from the fiscal restraint currently being imposed on the economy.

-The economic fundamentals have improved in six ways, with the first being that the U.S. household deleveraging process is well advanced and household debt to income (see chart below) has declined significantly and is now below its trend line growth rate.

-Second, the housing sector is clearly improving (supported by low interest rates), with housing starts rising by 33%, existing home sales rising by 12% and home prices up 7%. A housing recovery is key as it is a large part of household wealth, and leads to more building activity and a loosening of credit.

-Third, the international economic outlook has improved with strains in the euro-area receding since last summer (Cyprus notwithstanding), China growth recovering after a slowdown in 2012 and the Japanese making renewed efforts to grow faster and get out of a deflation trap.

-Fourth, with U.S. corporate profits relative to national income at a record high (see chart below) , and high cash balances, it is expected that they will shift towards higher real investment from stock buybacks and increasing cash balances.

-Fifth, The U.S. is in the midst of an energy revolution with the increased production of oil and natural gas (see chart below), with the sharp fall in natural gas prices spurring investment in energy-intensive manufacturing like petrochemicals which will provide an impetus to growth in future years.

-Sixth, financial conditions have eased considerably with credit spreads falling and equity prices reaching record highs, and the pricing and availability of consumer loans (notably auto) improving.

-Despite these improvements, the fiscal restraint at the federal level has shifted from a mild one in 2012 to a greater restraint in 2013 (see chart below) – in the form of increased payroll taxes, a rise in high income taxes, and the sequester – resulting in a fiscal drag of 1.75% .

-Current fiscal policy is misguided – rather than having only a mild-restraint in the near-term and building towards a substantial consolidation in the future decades – it seems to be the opposite with significant retrenchment in the near-term and no credible action over the long-term.

-Therefore there remains considerable uncertainty over the economic outlook, but with the fiscal drag likely to start abating by the year-end, the economy should strengthen further.

-Inflation continues to be below the target rate of 2.0%, as substantial slack remains in the labour and product markets. In addition, the trend growth of unit labour costs is below 1%, which is lower than the inflation rate and inflation expectations remain well anchored at 2.0%. Therefore, the risk of inflation significantly exceeding 2% over the next several years is quite low, even if the economy strengthens considerably.

-The Fed made several important changes to monetary policy last year, the most significant being that the Fed would continue buying assets until there was a significant improvement in the labour market, maintaining a easy monetary policy for considerable time after the recovery strengthens), and shifting to economic thresholds rather than calendar-based guidance (unemployment below 6.5% and inflation above 2.5%).

-An outcome-based purchase program would allow expectations of the purchase program to change as the economic data evolves making it an automatic stabilizing program. Sufficient evidence of sustained economic momentum would allow dialing back the program (“assuming that the improvement in the outlook is not endogenous to the chosen policy setting to the extent that it would disappear if purchases were slowed”), but any subsequent bad news would favour dialing up the purchases.

-While the labour market has showed some initial signs of improvement, important indicators like the employment-to-population ratio and job-finding rates (see chart below) are essentially unchanged, pointing to a still unhealthy labour market.

-Policy is based on the outlook for the labour market rather than the current unemployment data, and there is currently a disconnect between the recent improvement in employment and the still lacklustre economic growth – and when this happened in 2011 and 2012, employment growth subsequently slowed – and the risk remains that this could happen again this year due to the fiscal drag.

-The benefits of the QE program exceeds the potential costs – with the improving financial conditions having a significant impact on the economy, particularly in the interest rate sensitive areas of the economy including housing, autos and durable goods.

-The costs of the program have been manageable in terms of anchored inflationary expectations (see chart below) , lack of market impairment (in terms of trading volumes, bid-offer spreads etc) and perhaps increasing financial stability (lack of rapid credit growth-see chart below, improving growth prospects and preventing deflation).

-It is premature to focus too much on the normalization of monetary policy before a sustainable recovery has been achieved – this is akin to putting the cart before the horse.

-The big concern about monetary policy normalization is the increased risk of a rise in long-term yields with the market discounting forward the expected date of Fed tightening.

-However, this risk should be manageable because the threshold-based guidance should allow the market to continuously adjust its expectations based on changing economic outlook, the large balance sheet should continue to provide stimulus well after the purchases have ended, and the short-rate policy could stay “on-hold” for a significant period.

– “Currently we are falling well short of our employment objective and the restrictive stance of federal fiscal policy is a factor. On inflation, we are also falling short, but by a considerably smaller margin. As a consequence, we need to keep monetary policy very accommodative. I do not claim that there are no costs or risks associated with our unconventional monetary policy regime. But I see greater cost and risk in moving prematurely to a policy setting that might not prove sufficiently accommodative to ensure a sustainable, strengthening recovery.”

Dudley provides the clearest elucidation of QE policy I have seen, and it is clear that the Fed is far ahead of other central banks in terms of understanding the benefits (and potential costs) of QE policies – and is probably the main reason why the U.S. equity markets have dramatically outperformed global markets over the last several months (with the sole exception of Japan, and with the U.K. being close behind – see chart below- driving home the point that the stock markets which have outperformed have the most forward looking central bankers!).

It is , of course, helpful to have one of the world’s leading authorities on the Great Depression as head of your central bank in Bernanke! To quote from his recent speech at the LSE:

“modern research on the Depression, has changed our view of the effects of the abandonment of the gold standard. Although it is true that leaving the gold standard and the resulting currency depreciation conferred a temporary competitive advantage in some cases, modern research shows that the primary benefit of leaving gold was that it freed countries to use appropriately expansionary monetary policies. By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home. Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates.

The lessons for the present are clear. Today most advanced industrial economies remain, to varying extents, in the grip of slow recoveries from the Great Recession. With inflation generally contained, central banks in these countries are providing accommodative monetary policies to support growth. Do these policies constitute competitive devaluations? To the contrary, because monetary policy is accommodative in the great majority of advanced industrial economies, one would not expect large and persistent changes in the configuration of exchange rates among these countries. The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates; they come instead from the support for domestic aggregate demand in each country or region. Moreover, because stronger growth in each economy confers beneficial spillovers to trading partners, these policies are not "beggar-thy-neighbor" but rather are positive-sum, "enrich-thy-neighbor" actions.”

The graph below clearly illustrates the positive impact of an accommodative monetary policy on economic growth during the Great Depression – and with the U.S. first out of the block during the current Great Recession- it is no surprise that they are experiencing the earliest recovery.

QE is here to stay – at least until the year-end. Cumberland Advisors estimates that even if employment grows at 210,000 jobs per month, the earliest period for the unemployment rate to reach 6.5% is Feb 2014 until May 2014. However, if the GDP continues to grow at 2.5% (implying a lower sustainable rate of employment growth) the earliest date for unemployment to reach 6.5% is July 2015.

Why a High Carbohydrate & Low-Fat diet? – Part 4.

Three weeks ago I wrote about the remarkable life-story of Nathan Pritikin, a pioneer in the field of diet and health, who argued the case for a largely vegetarian high complex-carb diet to battle heart and other chronic diseases. This week I present below the fourth part of the summary of a path-breaking article (“High Carbohydrate Diets; Maligned and Misunderstood”) he wrote in the Journal of Applied Nutrition in 1976, whichstill resonates today!

-Can a diet restricting fat to 10% of calories lead to fat deficiencies?! The only fat which the body cannot manufacture in linoleic adic – and recent research has shown that only 0.1% of linoleic acid is required by the body to correct essential fatty acid deficiency.

-In our preoccupation with increasing protein and fat intake, the negative effects of excess protein intake has been overlooked. There is a direct correlation between protein intake and excretion of minerals in humans – a study of 2,000 Berkley students showed that increasing protein intake from 0 to 90 gms, resulted in an 800% increase in calcium excretion, regardless of the calcium intake which varied from 100mg to 2300mg.

-Another study students at Farleigh university confirmed that high protein and low carbohydrate diets resulted in significant excretion losses of calcium, phosphorous, iron, zinc and magnesium. Other studies have showed lower bone loss in elderly vegetarians than in those on mixed diets.

-A study on Alaskan Eskimos, who have a traditional high protein diet, showed that after 40 years of age, Eskimos have 10-15% less bone density than whites, and with each decade of age, they had 50-100% more bone loss than whites. Also, bones loss started 10 years earlier even though calcium intakes were very high at 2g per day.

-These studies help show why western populations on high protein diets require mineral supplements, while people like the Bantus on a 10% mostly vegetarian protein diet, and an average daily calcium intake of 350mg, require no supplements – Bantu mothers give birth to an average of 9 children without showing any loss of bone density.

-High consumption of animal protein, with the resulting ingestion of excess cholesterol, results in elevated blood cholesterol levels. It also implies high consumption of animal fat – and fat consumption in excess of 10-15% of calories (compared with the 35-40% in the typical modern diet!) is toxic.

-Excess fat, whether animal or vegetable, create problems in three ways: 1) they interfere with carbohydrate metabolism which is the primary cause of diabetes, 2) elevated cholesterol and uric acid plasma levels results in them being moved to tissues and other areas of the body, and, 3) the production of tissue anoxia (lack of oxygen).

-A study involving feeding high fat cream meals to hamsters showed that their plasma oxygen levels dropped by 68% in 3 to 6 hours. It took 72 hours without food to regain 95% of the original value.

-A study on human angina patients showed that after a high fat cream meal, within 6 hours the blood became 600% more fatty/turbid causing a dramatic increase in angina attacks and abnormal ECGs. The same patients, on having a fat free drink with the same calorie content and bulk, showed no increase in angina attacks, blood turbidity or abnormal ECGs.

To be continued!

Here is to dispelling the mythical benefits surrounding a high protein, high fat and low complex carbohydrate diet!

Regards,

Aditya

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