A Disguised Depression in the US Economy

Mr. Bernanke’s price-fixing scheme ran over a speed bump. The Dow dropped 216 points. Just a jolt, for now. The brick wall is still ahead.

But we will try to give the devil his due.

First, this from our own right-hand man, Chris Hunter (investment director for the Bonner & Partners Family Office) with a more generous assessment of Fed policy:

‘I’m not sure it’s right to say that the Federal Reserve has been retarding a recovery…If you look at the US, things aren’t perfect, but they’re a hell of a lot better than they are in Europe, where the ECB is not engaged in QE…’

Well, maybe. Almost the entire difference in performance from Europe to America can be explained by the way they jiggle and jive the numbers…and the rigidity of the European labour market…but let’s move on.

More from Chris:

‘I think it’s more accurate to say that the Federal Reserve money printing is unable to get credit into the hands of those who need it – small businesses…

‘But do lower interest rates make it harder for small businesses to access credit? Surely, it’s more a case of banks being unwilling to lend… not lower rates making credit harder to access…’

Why are the banks unwilling to lend? Because there is a Great Correction going on…long, drawn-out…and delayed by the Federal Reserve.

Lending money to small businesses is risky, particularly in a correction. Big businesses, on the other hand, are protected by the Federal Reserve.

Fixing prices always results in shortages. Artificially low interest rates — the price of credit — stifle real savings and real credit. Fed credit — phony savings — goes only to the largest borrowers, especially the US government and government-owned borrowers Fannie Mae and Freddie Mac.

Chris continues:

What’s notable is that when central banks are running loose monetary policy during a deleveraging (US in 1933-37, Britain in 1947-69 and US from March 2009 to present), we see:

1. Positive GDP growth
2. A drop in debt-to-GDP levels.

But during deleveragings when central banks ran tight monetary policy (US in 1930-32, Japan 1990 to 2013 and pre-QE US 2008-09), we see:

1. Negative GDP growth
2. A rise in debt-to-GDP levels.

I think it’s valid to argue that the Federal Reserve is overstaying its welcome with QE…

But the evidence suggests that monetary easing can prevent depression-like phases in the US economy…

We’ll hold our disagreement for a moment while another central bank fan has his say. Here’s Martin Wolf at the Financial Times, who thinks the Federal Reserve has prevented ‘depression-like’ conditions in the US:

‘Central banks, including the Federal Reserve, are doing the right thing. If they had not acted as they have over the past six years, we would surely have suffered a second Great Depression. Avoiding such a meltdown and then helping economies recover is the job of central banks…

‘The financial crisis coincided with falling real house prices in the US and triggered deleveraging among financial institutions and households. It took strong monetary and fiscal action to offset these contractionary forces. Since fiscal support was, alas, withdrawn prematurely, the burden fell on the Fed. With short-term interest rates at the zero bound, it had to influence longer-term rates if monetary policy was to gain traction.

‘Exceptional times call for exceptional measures. Those who criticise the Fed so bitterly either lack imagination or are indifferent to what would have happened to the economy and fellow citizens if the Fed (and other central banks) had sat on their hands.’

Are you convinced, dear reader? We’re not.

First, because the comparisons offered purporting to show that loose monetary policy works better than tight policies are not persuasive. This isn’t science.

This isn’t even pseudoscience. This is just pure guesswork based on half-baked conclusions that themselves are grounded in dubious statistics and improbable assumptions.

Second, unless this really is a new era, it is still impossible for professors of finance to do a better job of setting prices than the market system. These guys had no idea what would happen. They had no idea what was happening when it happened. And they had no idea what to do about it after it happened.

And now Ben Bernanke sets the price — as near as he is able — of short-term credit. Using his ZIRP and QE, he aims to set prices for stocks and bonds too.

Housing, too, is sensitive to Bernanke’s heavy-handed interventions. Trying to raise the CPI, he is explicitly working to raise prices for all consumer items. Did price fixing work for Diocletian? Nixon? Hitler? Stalin? Peron?

Show us the case in which price setting by government hacks has outperformed a market system. Show us the hack who is smarter and better informed than 300 million consumers, investors and businesspeople. Show us a single instance in which the hacks have actually made people better off.

Third, the great claim made by both our own colleague and by Martin Wolf, not to mention Mr. Central Banker himself, is that central bank economists have avoided depression-like conditions.

Well, if you were one of the 3 million Americans whose job doesn’t exist, you might think that depression-like conditions weren’t avoided at all. Stocks went up. Housing is going up. But the US economy?

Do the math correctly — GDP and unemployment — and you see conditions that look ‘depression-like.’

What the Federal Reserve has produced is depression-like conditions without the salutary effects — the creative destruction — of a real depression. A depression is like Drano. It’s a good thing — when it is short, swift and thorough. It flushes the gunk out of the economy’s pipes.

But the Fed didn’t permit a real depression. It stopped the cleansing…and then dumped more goo down the kitchen sink. Deadhead bankers got more grease. So did big corporations and the government. And now, for six years, the system has been blocked up with yucky stuff, retarding real growth.


Bill Bonner
for Markets and Money

Join Markets and Money on Google+

for Markets and Money

From the Archives…

Why You Should Keep Your Portfolio Grounded in Cash
31-05-13 – Vern Gowdie

China’s City in the Sky
30-05-13 – Dan Denning

House Prices First, Stocks Second.
29-05-13 ­– Dan Denning

Why Natural Gas Could be the Next Crucial Industry for Australia
28-05-13 – Dan Denning

The Japan’s Nikkei is Starting to Crack
27-05-13 – Dan Denning

Claim your FREE Special Investor Report…

Five Fatal Stocks You MUST Sell Now
Markets & Money Free ReportIf Markets and Money editor, Vern Gowdie is correct, the Australian stock market could be headed for a devastating correction to rival the GFC. And these five stocks will be dragged through the financial carnage.

Download this free report now and discover:

  • The five biggest threats to your wealth on the ASX: Discover why these five household–name stocks pose a threat to your wealth… and why they’ll be the first to lose you money when Aussie stocks drop dramatically.
  • The ‘wealth destruction effect’: High share prices in the US have created the illusion of wealth. This ‘wealth effect’ has filtered through to our market and economy. But when the ‘bubble of all bubbles’ bursts in the US, stocks will drag our economy down with them. These ‘fatal’ five will be the first to fall.
  • Get out while you still can: Why we’re just months away from a major correction in the US markets… and how that will swiftly hit the ASX. These five companies make up nearly half the entire Aussie market… and you almost certainly own one of them.

To download your free report ‘Five Fatal Stocks You MUST Sell Now’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

To have Bill's reckonings delivered straight to your inbox subscribe to Markets and Money for free here.

Read more

Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

3 Comments on "A Disguised Depression in the US Economy"

Notify of
Sort by:   newest | oldest | most voted




not happy Jan

and then there’s

not happy jIM


You will hurt your fingers if you keep up all that shouting

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au