How Quantitative Easing Destroys Jobs

On Wednesday Fed chair Ben Bernanke met with senators in a closed-door session. Bernanke said that he “remains absolutely committed to not letting inflation or inflationary expectations get out of control.” “Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, said Bernanke cited an estimate that the program may help create 700,000 to 1 million jobs.”

Of course, if simply printing money could create jobs, without creating inflation, we would all be rich. Unfortunately, the Fed’s quantitative easing is likely to destroy jobs.

This morning Lands’ End sent me an e-mail announcement of their latest sale. One part of the sale caught my eye—spend $250 and receive $100 off with free shipping. This 40% off offer included any items already on sale.

Lands’ End can only dream of the good old days when their sales ran only at the end of the season. Winter clothes would not go on sale until January. And now, here we are the week before Thanksgiving, and everything is at least 40% off.

This is probably a pretty good harbinger of how consumer spending will go this holiday season. With that in mind, consider this Bloomberg News story from earlier this week:

Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs.

“It’s a little terrifying to deal with cotton suppliers now,” said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients.

Cotton futures in China have surged more than 70 percent this year and were at a record earlier as the global economy emerged from recession, allowing people to spend more on clothes. Production of the fiber in China, the world’s biggest user and importer, is forecast to lag behind demand for a 12th year, cutting its stockpile to the smallest since 1995, according to the U.S. Department of Agriculture.

To be sure, there are wide differences of opinion about the impact of Fed policy; but most analysts believe that the rise in commodity prices this year is a new asset bubble created by anticipation of the Fed’s policy of quantitative easing. And the effect on Lands’ End is clear.

Do you think Lands’ End is going to be able to raise prices and pass along their increased costs? I don’t. If they had that pricing power they would not already be running 40% off sales. Instead their margins are going to get squeezed by rising commodity prices. Lands’ End will cut back in other ways—they may lay off staff and downsize.

Of course, I could be wrong. Commodity prices may crash from here. If so, we will hear news stories about the financial institutions and hedge funds that made incorrect bets. We will be told we need to bail them out for our own good. Or perhaps commodity prices will stay high; perhaps Lands’ End has pricing power that I’m not aware of. They could then increase prices of their clothing. In the face of declining real incomes, what will the average American household do? Will they decrease their spending still further, or will they increase their credit card balances to finance their clothing purchases? I would bet spending decreases. Then quantitative easing will have had the effect of chilling the economy.

Lands’ End will not be the only organization caught between understandably tightwad consumers and rising commodity prices.  If they are forced to lay off workers, they will not be the only firm to do so. Thanks to the Fed, for commodities traders and hedge funds specializing in commodities, 2010 may be a good year; for the average American, not so much.

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