QE2 – Not Exactly a Lifesaver For Small Businesses

by Taras Berezowsky on December 9, 2010

Style:    Category: Manufacturing, Public Policy

If I were to do an informal survey right now, I’m pretty sure a sizable number of our readers either work for small manufacturing businesses or depend on small businesses to continue their operations.

That’s why the argument that Scott Shane lays out in a recent Business Week article is pretty important to our readers indeed, to the majority of working Americans in the country today. Shane asserts that the Fed’s second installment of quantitative easing will do very little to help small businesses (which account for roughly half of the private-sector economy), instead potentially widening the gap between them and their large multinational counterparts.

The jobless rate remains high, up to 9.8 percent in November, and the Bureau of Labor Statistics reported that only 39,000 new jobs were added last month at least 150,000 a month are needed to keep the unemployment rate stable. The Financial Times outlines the good news: the PMI slipped only 0.3 points to 56.6 last month, according to ISM, keeping up the recent trend of overall positive growth, which is what many economists expected. “Manufacturing was fuelled by accelerating growth in imports, inventories and supplier deliveries, the article reads. “However, employment, production and new orders grew more slowly in November.

Small businesses are especially hurting in the latter three areas. The slightly improved manufacturing statistics may not be reflective of what SBs are facing, and indeed, SB owners are responsible for many of the new jobs added. Shane points out that the Small Business Administration says small companies generate more than 50 percent of “nonagricultural private-sector gross domestic product but only 31 percent of exports.

The major goals of QE2 to drive bond interest rates down and hope banks will lend more are lost on SBs, because they are suffering from lower demand for their products/services and have no incentive to borrow money to expand their operations (not that the banks are champing at the bit to lend anyway.)

What we’re left with is to push for more constructive developments on the fiscal policy side of things, not the Fed’s monetary policy, as Shane concludes. The Obama administration’s recent compromise on extending the Bush tax cuts is step in this direction; entertaining the idea of a QE3 is not. Lisa Reisman and Jason Busch, editors of MetalMiner and Spend Matters, respectively, outlined exactly what Congress needs to do in 2011 to help the manufacturing sector many of their ideas apply to the future health and well-being of small businesses, those very companies serving as the heartbeat of a nation that makes and builds things.

–Taras Berezowsky

{ 2 comments… read them below or add one }

1 Josh December 9, 2010 at 10:05 am

As a small business owner I believe that QE2 will likely have a positive impact on many small businesses (mine included). If banks can borrow from the Fed window at zero and put the money into treasury products for a risk free return, that is a material disincentive to take on the additional risk of lending to private commercial borrowers (of any size). With QE2, the prurchase of Treasury product by banks will move along the scale from “risk free return” to “return free risk”. This should help to reincentivize banks to engage in the private lending (which is the primary function of banks) as their yield spread from other investment options shrinks. I believe that a case can be made that QE2’s incentive to engage in real lending will: 1) help banks repair their balance sheets, 2) help their commercial borrowers to grow.

The other impact that QE2 can have is that it creates a consequence to China for its Currency manipulation. China may decide to continue to keep its currency artificially low, but with QE2, doing so will create increased inflation within China, as raw materials go up in in dollar denominated terms in order to retain real value. As China’s domestic market for finished expands with their growing middle class and overall wealth, China will have to decide if they are more comfortable with higher domestic inflation or a stronger currency. As Chian is encouraged to move the needle towards a stronger currency, this will also help small American businesses.

I appreciate your article as it gets people thinking about how specific policy issues impact them directly. Keep up the good work!

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2 tberezowsky December 9, 2010 at 10:27 am

Dear Josh –

You’re right, let’s hope QE2 re-bolsters the banks’ incentives to lend to private businesses – time will tell, and we’ll keep an eye on it. As for the China argument, we definitely agree (check out Lisa’s post on this if you haven’t already).

Thanks for your input!

Cheers,

TB

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