The True Products of Quantitative Easing

And now over to Bill Bonner from Baltimore, Maryland…

Well-traveled asparagus…and the US in recession…

Markets were closed in the US yesterday. We didn’t bother to look at what happened outside the US.

We were tired. After traveling to China, Switzerland, England and France…we had run out of gas.

But yesterday, Memorial Day in the USA, gave us a time to fill up the tank.

First, we fired up the lawnmower. Then, we got the weed whacker working. Next, it was time to start the tractor, attach the bush-hog, and begin cutting the fields.

Each of these devices requires oil and gasoline. So, we thought again about how our standard of living depends on the black goo…about which, more below…

First, let us look again at the state of the economy; to make a long story short, the US is probably in recession again.

While we were traveling around the globe, the data continued to come in. It offered no surprises. Instead, it was more of the same. Housing is in a bitter slump, with prices down more than 30% nationwide and now falling at about 1% per month.

Unemployment remains a problem area. Officially, the unemployment rate is around 9%. But the real rate of joblessness, according to Yale professor Robert Shiller, is closer to 16%. New jobs are being created. But there are not enough of them to keep up with population growth and allow the unemployed to get back to work.

Another problem is that the jobs being created tend to be in government, government-sponsored businesses, or other low-productivity, low-wage activities.

You can earn money parking cars, for example. But not very much. Nor does parking a car contribute much to standards of living. So real wages go down. Wages increased by 1.9% over the last year; that was exactly equal to the official estimate of price increases. But prices are rising faster than the official CPI, as we’ll explain in a moment.

Meanwhile, the feds have completely failed. The figures we reported last week showed that the ‘recovery’ efforts had totally washed up. Each job ‘created’ by QE, for example, cost more than $800,000. Assuming the average wage is about $40,000, this means the program destroyed the equivalent of 20 jobs for every one it created.

Instead of creating jobs, the Fed’s QE program created inflation – especially in the price of energy. Family budgets suffer. Here’s an AP report:

NEW YORK (AP) – There’s less money this summer for hotel rooms, surfboards and bathing suits. It’s all going into the gas tank.

High prices at the pump are putting a squeeze on the family budget as the traditional summer driving season begins. For every $10 the typical household earns before taxes, almost a full dollar now goes toward gas, a 40 percent bigger bite than normal.

Households spent an average of $369 on gas last month. In April 2009, they spent just $201. Families now spend more filling up than they spend on cars, clothes or recreation. Last year, they spent less on gasoline than each of those things.

The ramifications are far-reaching for an economy still struggling to gain momentum two years into a recovery. Economists say the gas squeeze makes people feel poorer than they actually are.

They’re showing it by limiting spending far beyond the gas station. Wal-Mart recently blamed high gas prices for an eighth straight quarter of lower sales in the US. Target said gas prices were hurting sales of clothes.

Every 50-cent jump in the cost of gasoline takes $70 billion out of the US economy over the course of a year, Hamilton says. That’s about one half of one percent of gross domestic product.

The latest GDP numbers show ‘growth’ happening at the rate of 1.8% per year. But, like everything else the feds report, the figures are probably little more than wishful thinking and bald-faced lies. In order to come up with a GDP growth number, the feds take the raw figures and then subtract inflation to come up with ‘real’ GDP growth.

The number they use to ‘deflate’ GDP is their annual CPI-U figure 1.9%. But the first quarter of this year showed prices rising much faster, with a CPI-U figure annualized to 5.7%. We won’t even mention the higher figure provided by the Billion Prices Project. In other words, if they applied their own inflation number for the first quarter, to their own GDP number for the first quarter, US GDP would not be going up at all. It would be going down at a 1.8% rate.

And more thoughts…

As we were saying…we mowed the lawn yesterday. And we began to think of what would happen if the average suburbanite in Shanghai or Beijing also began to mow his lawn on weekends.

This is hardly a novel thought. Economists have been writing about it for many years. The emerging markets are bound to use more energy. And the price of energy is more than likely to go up.

Standards of living in the emerging world are bound to go up too as people put a little more energy into their lives. They will inevitably benefit from more locomotion and refrigeration. Maybe they will soon be using leaf blowers too.

But what will happen to standards of living in developed countries?

Of course, a lawnmower doesn’t take a lot of gas. Even if the price of oil doubled our lives wouldn’t change much.

But all of modern civilization depends on oil. And everything that we take for granted – asparagus trucked from California, leaf-blowers, and air conditioning – is set up not only to work on oil, directly or indirectly, but to work at today’s price. Double the price of oil and a lot of what we see today becomes uneconomical.

Fortunately for the United States of America and Canada, we have a lot of energy…and we use it freely, easily, and lavishly. If the price of oil were to double, we could cut back…and still live well. We might even live better. Because not everything that contributes to our standard of living contributes to our quality of living.

Take asparagus, for example. If oil is cheap enough, you can afford to ship asparagus from California to Maryland and sell it at a reasonable price. Standards of living go up – at least as measured by GDP. The grower in California earns money…his illegal immigrant workers earn money…the trucker earns money…the grocery store in Maryland earns money – voila, the GDP goes up.

But raise the price of oil and transcontinental asparagus may not make any sense.

We ate the most delicious asparagus in Zurich! Big, white, tender…juicy. “Where did it come from?” we asked our host.

“Why… It’s from Zurich, of course.”

He must have meant the canton. We saw no asparagus grown in downtown Zurich.

It was surely not cheap – nothing in Zurich is cheap. But it was good. Much better than the asparagus you find in the US.

We’re just guessing, but we suppose it was good because it was grown for a local market and did not have to be a variety that travels well. A trip from Sacramento to Philadelphia is tiring for anyone; if your asparagus is going to hold up…it has to be tough.

Perhaps, when prices of energy are higher, our asparagus will not be so well-traveled. Maybe, as our standards of living stagnate, our asparagus will taste better.


Bill Bonner
For Markets and Money Australia

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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