How Quantitative Easing Has Paralyzed the US Economy

Who can you trust?

Whoa… Big sell-off in stocks yesterday. The Dow down 242 points. Investors were worried…

..about new explosions in Japanese nuclear plants…

..about Europe’s periphery states on the verge of default…

..about revolutions, demonstrations and civil wars in the oil producing states…

..about this…about that…

But along comes the good ol’ Federal Reserve. It’s telling Americans not to worry. The economy is on a “firmer footing” it says.

Oh? Is it? We don’t think so.

But we’ll let the Fed tell its side of the story first. Here’s the report from Bloomberg:

Federal Reserve officials signaled they’re unlikely to expand a $600- billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane.

The economy is on a “firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said in a statement yesterday after a one-day meeting in Washington. While commodity prices have “risen significantly,” inflation expectations have “remained stable.”

Really? Is the economy on a firmer footing?

Well, let’s look at the evidence. On Friday, the numbers showed that shoppers were going back to the malls that once knew them. Sales figures showed the biggest rise in 4 months.

But unemployment is still “elevated,” with about 10% of the labor force out of work, depending on how you twist the numbers. Houses are still being foreclosed. And house prices are still going down.

And get this, the Michigan consumer sentiment index has dropped to 68 – only 4 points above its low set after Lehman went broke.

Odd, isn’t it? We mean, how is it possible that people who have no jobs…and whose main asset is falling in value…can spend more money?

Maybe this is the answer. Maybe Ben Bernanke’s program of QE – in which the Fed puts in $4 billion per day in an effort to boost stock prices – is paying off. Stocks went up. People felt richer. They spent more.

The Fed figures also show a modest rise in consumer credit – the first increase since ’08. Savings rates are also on the decline again.

But here’s another explanation: People are able to spend more because they’re defaulting on their mortgages. More than one in 10 mortgages is not being paid. That frees an enormous amount of money for other things.

It’s not the same as genuine, sustainable growth…but who cares about that?

Well, the point is, if the Fed is counting on a real recovery – so it can take away all the funny money it’s been pumping into the economy – it will probably be disappointed. The funny money has created a funny economy. The feds have been pumping in money at a record pace. Not only through quantitative easing…but also through deficit spending and ultra low interest rates. Rates have been close to zero for the last 27 months. And the deficit keeps growing.

But each time they bring out a chair, the economy forgets how to stand on its own two legs. Now, after years of sitting down…it is paralyzed.

At least, that’s our theory. If the feds take away their QE program – now scheduled to expire in June – the economy is likely to fall on its face.

The Fed says it will take away QE as planned. We say it will find an excuse to continue the program, if not immediately…after a decent interval.

So, who ya gonna trust? The world’s most famous and powerful economists? Or Markets and Money?

The feds – who told you there was nothing to worry about in ’07…and besides, they said they couldn’t spot a bubble if it was stuck to their noses…?

Or Markets and Money, who told you to duck?

And more thoughts…

More thoughts? Well, we don’t have any more thoughts, so…we’ll give you an update on the family.

As long-term Markets and Money sufferers know, we have 6 children, who have appeared in these updates from time to time over the years.

They appear less frequently now, simply because we see less of them. Will is in Florida, with his wife and growing family. He’s working on exciting project. “Paypal with gold,” he describes it. Sophia is busy in her career as a massage/yoga/physical therapist. Maria is in California…getting small parts in movies, such as The Social Network and TV shows, such as CSI. Jules has begun his musical career, composing songs and singing at clubs in New York. Henry is in college, in his third year as a pre-med student. Only Edward, the youngest, remains at home. And he finishes his high school career in June.

Yesterday, concerned with his career as a scholar, Elizabeth organized a meeting with his teacher.

“Oh yes, Edward… Hmmm… Well, he has a classic case of senior slump,” said the professor.

“I think what happened was that after he got accepted to a couple universities,” his mother explained. “Then, he decided that he didn’t have to work anymore.”

“Yes… We see that from time to time,” the teacher continued. “But Edward is an extreme case. He really just seemed to stop trying. He comes to class but doesn’t pay attention. He only does half his homework.

“Okay… So maybe it doesn’t really matter. I mean, he’s on target to graduate. And he’s been accepted at a university. But how’s he going to do when he gets to a big university and he’s gotten in the habit of slacking off?”

It was a good question. We put it to Edward.

“Look, I’m no good in school, anyway,” the young man replied. “I’ll work when I have to work. But there’s no point in working when I don’t have to work. I don’t like it. And it doesn’t do me any good. I’m not a good student. I’ve never been a good student. And working hard now won’t make me a good student.”

He had a point too. What could father-knows-best say?

“You’re probably right… It won’t make any big difference for this year. And you’ll start out next year with a clean slate. At least, it will be clean academically. But it won’t be empty. You’ll have your own habits…your own self-discipline. And the way you feel about yourself.

“And you want to feel good about yourself. You don’t want to feel like a kid who slacks off or gives up just because there’s no immediate payoff.

“All right, so you’re not a great student. So what? Over the long run, it’s not the great student who succeeds. It’s the guy who gets to work…and doesn’t get distracted…or thrown off course.

“When you’re 40 years old, no one will care if you were a great student or not. But they’ll care if you work hard…if you keep at it…if you don’t give up. If you care about your work…and always try to do a good job.

“Remember… No one knows who will succeed or why. All they know is who deserves to succeed. And that’s all you can do…deserve it.”

“Okay Dad…I’ll get back to work…”


Bill Bonner
for Markets and Money

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 Money.
Bill Bonner

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