Has Money Printing Worked for the US Economy?

Everything is looking good for the US of A! Or is it?

The dollar — up.

Auto sales — up.

House prices — up.

Consumer confidence — up.

Consumer credit — up.

Stocks — up.

Oh, and jobs are up too…

As to this last point, even normally gloomy economist at brokerage Gluskin Sheff David Rosenberg feels the light of a rising sun on his face. The recent jobs report was a ‘game changer,’ he says:

‘First came the healing in the credit markets in 2009-2010. Then came the healing in the housing market from 2011 to now. And now we have the third act in full swing, which is the healing of the labor market.

‘It’s not merely the 195,000-plus in the headline payroll data for June and the upward revisions that really made it a 265,000 reading. It was the fact that the private sector added 202,000 net new jobs and that basically has been the norm now for the past five months.
Considering the magnitude of this year’s intense fiscal squeeze, only the most ardent pessimist would regard this as anything other than downright impressive. In the leveraged 2002-2007 cycle, the average monthly gain in private payrolls was 136,000. In the tech boom 1992-2000 cycle, the average was 210,000.

‘So I’ll leave it up to you to judge how the current pace of 200,000 should be treated in that context. The case for the Fed’s above-consensus forecasts to be met this time around, especially as the budget cuts fade in 2014, looks pretty strong to me…’

‘When the facts change,’ said Keynes to a heckler, ‘I change my opinion. What do you do, sir?’

What this suggests to us is that Keynes’ opinions weren’t very good in the first place.

But what about us?

Should we change our opinion, dear reader?

Could it be that we were wrong? Could it be that the US economy really is recovering? Could it be that stocks are in a real bull market…not just a hysterical, Fed-fuelled bounce? Could it be that you don’t really need gold anymore because the feds really do have this credit cycle thing under control?

Should we admit we were wrong, sell our gold and buy all the US stocks we can afford?

Nah. Remember our dictum from yesterday:

You can’t cure an alcoholic by buying him another drink. He may get high again. But the problem is still there…and getting worse.

The US economy (this applies broadly to the economies of Japan and Europe too…but we’ll leave them out for the moment) reached a turning point in the 1980s. Natural, healthy, sustainable growth gave way to credit-boosted phony growth.

We’ve been over this many times already, but it’s important to understand. The ‘growth’ of the last 30 years was not like the growth of the 30 years before it. It was not based on rising productivity, increased wages and real capital formation.

Wages stagnated. The only way people could increase their standards of living was by spending money they didn’t have. That’s where the credit came in, made possible by America’s post-1971 flexible paper money system.

Spending money you don’t have is one of those things that economist Herb Stein had in mind when he said, ‘When something can’t go on forever, it will stop.’

In the event, it stopped in 2007 — with total US debt at about 360% of GDP, up from under 200% in 1980.

Since 2008, the feds have worked feverishly to get their mojo back…administering larger and larger doses of credit to an economy that already had more than enough.

But wait…

‘More than enough?’

How do we know how much debt an economy can carry? And looking around the world, we find that Japan, Britain and Ireland have far more…over 500% of GDP for each of them.

Hey…if they can do it…so can we! At least, that seems to be the theme of the whole show now.
The Fed offers more EZ credit. Investors believe this will lead to more good times. And consumers — bless their stupid little hearts — are getting in the spirit of it. They’re spending even more money they don’t have on even more stuff they don’t really need.

Yes, dear reader, after a short period of deleveraging, mom and pop…bro and sis…and all their kin from Palm Beach to Prudhoe Bay…are taking up the challenge. Here’s Reuters with the report:

‘Consumer credit increased in May by the most in a year, a sign low borrowing costs were boosting economic growth although interest rates have since risen.

‘Total consumer installment credit advanced by $19.6 billion to $2.8 trillion, Federal Reserve data showed on Monday. Economists polled by Reuters had expected consumer credit to rise $12.5 billion during the month.

‘Consumer debts grew both for non-revolving credit, which includes loans for cars and college tuition, as well as for revolving facilities like credit cards. Overall consumer debt rose the most since May 2012.’

Now the government is adding debt…and so is the private sector.

Whee! Is this a great economy, or what?

The feds wanted to get the US economy moving — in the worst possible way. From where we sit (in rural Normandy), it appears they may have succeeded.

They may have once again prevented a big correction. Now they’ll face an even bigger one down the road.


Bill Bonner
for Markets and Money

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From the Archives…

Central Bankers in Driving Seat
5-07-13 – Greg Canavan

China’s Economic Rebalancing and the Impact on the Australian Economy
4-07-13 – Greg Canavan

Gold Market Rhyming
3-07-13 ­– Greg Canavan

How Low Can the Gold Price Go?
2-07-13 – Bill Bonner

No Real Economic Recovery Without “Hitting Bottom” First…
1-07-13 – 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 Money.

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