Thanks for your thoughtful post. The problem is the missing part of the equation, and it isn't the "presence" of more money that makes the money "velocity" increase or decrease, it's the hidden assumption that money is going to be put into the economy through a secondary process, like, lending to joesixpac for business development, entrepreneurial adventure capitalism, housing by granting loans etc.
The printing of money only fills the pond. To drain the swamp, or the logjammed wall that holds that money back from circulating, you have to remove the government from the part that allows those banks to reinvest back in the very entity that gave them the money in the first place. Banks are playing it safe with safe haven investments, and the Fed is the pusher of this narcotic.
Until some of that money sloshes over the dam of easy Fed reinvestment, or blows the dam away by closing that window, all the money in the world given to banks will just merrily collect three percent from Uncle Sam, while we die of thirst downstream.
Again, the unwashed believe in QE3, and that element hasn't a thought except "gimmee" whether it works or doesn't, under the present safe harbor we allow big banks. When that port is closed, banks must go back to deeper waters, and start fishing for risk on clients.
I call them joesixpac.
Wednesday, the Fed will throw some words on to the fire, but offer no fresh capital in the marketplace. The lemmings will swoon, so be prepared for banging our collective heads against the resistence in both the Dow and S and P, which have reached pre 2007 levels on the strength of the current "gimmee".
It will provide the technicians with all they need to say "gotcha".
I agree, QE3 is off the table for now. But there are those that pump for it. If it were to be done, it would be for different reasons than the first two, which countered the drop in the velocity of money. In examining the Japan situation, the Fed said that Japan could have done more. But it could turn out to be just pushing on a string, or it may work. The Fed said, if growth were to slow towards zero, and inflation was well below their goal of 2%, they would consider a QE3. And right now, no matter how painful our low growth is, the QE3 conditions don't exist.
The banks aren't lending, though there has been a up tick. Lending standards have been forced up, and it is also a matter of loan demand as well. So it it not just the banks. The economy will eventually build momentum.
I understand the feeling about the dismal returns investors are getting from low interest rates. "The only thing to fear is fear itself." People are going for safety. And unfortunately the only other place besides safety, moving out the risk curve, has been commodities. Real estate, the stock market and other riskier investments have been taboo. There'll be a shift back. And the reason for low interest rates has always been to encourage the economy to take on more risk. It'll happen.
Thanks again for maintaining the on topic dialogue. Be advised however, I spent most of the last quarter century dealing in the Far East, Japan in particular, and their low interest approach to getting well from the bubble in the nineties when the stock market was 39000, not 9000, was lower interest rates to save the zombie banks.
It's been 25 years, and nothing has happened. Why? Low irates is only half the equation--you have to take some risk, and Japan burned once, hasn't shown the entrepreneurial cojones to start from scratch in the free market. Every night the market is open, they mimic the US like a little brother not knowing where else to go. 242 trading days out of 250.
They got the low irates, that is step one. But if they don't go to step 2--invest in single person proprietorship or partnership ventures, they can't get well, ever.
We are headed in the same direction as Japan unless banks get incentivized to lend to joesixpac, for refi's,for new loans for new homes, new small business, 70% of America's business landscape is where the new small business has been.
Now we've been "trained" just like the East Germans were "trained", to wait for the government to do all the heavy lifting.
When East and West Germany combined, the older generation that arose after the wall went up? They tried to retrain them in capitalistic entrepreneurial enterprise--they tried for ten years and failed, giving up, waiting for them to die off.
I don't like to paint a picture of our future like this, but I call them as I see 'em.
"And the reason for low interest rates has always been to encourage the economy to take on more risk. It'll happen."
After two economic bludgeonings in the last decade, and a government who wants to redistribute the rewards of risk, it's going to be a while. Beating the fixed income crowd with the low interest stick is only going to create more dependence on government largesse...