Why a Real US Recovery Would Mean Disaster for the Economy

Want to know why Bernanke won’t stop QE & ZIRP? Because they don’t work. From CNNMoney:

Don’t worry about rising rates, say legendary bond investors Jeffrey Gundlach and Dan Fuss…

Doubleline Capital’s Gundlach and Loomis Sayles’ Fuss say the recent rally in yields is unlikely to continue, thanks to the Fed.

Both say the Federal Reserve will make sure that any rise in rates will be slow and controlled. Gundlach and Fuss said that the consequences for global markets and the economy will be dire if the central bank fails.

“People have been saying that the Fed thinks the economy is self-sustaining, and that means lack of support for bonds,” said Gundlach. “But the whole structure of the financial markets has been balanced on top of low interest rates.”

Yes, dear reader, a few years ago, it would have seemed absurd and/or criminal. Now it seems indispensable. The Federal Reserve keeps real interest rates in negative territory (below the level of consumer price inflation)…and supports the banks and speculators with an avalanche of cheap credit.

And now, the whole economy depends on it…

But ZIRP and QE are quack remedies. They’re like bloodletting…which makes the patient worse and prevents him from getting better. Since QE and ZIRP don’t work, the economy doesn’t recover…so it needs more “help” from the Fed. From Bloomberg:

‘Manufacturing in the US unexpectedly shrank in May at the fastest pace in four years, showing slowdowns in business and government spending are holding back the world’s largest economy.

‘The Institute for Supply Management’s factory index fell to 49, the lowest reading since June 2009, from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction. The median forecast of 81 economists surveyed by Bloomberg was 51…

‘”Manufacturing is really stymied by slow corporate spending and government spending cutbacks,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who was the only analyst in the Bloomberg survey to correctly project the drop in the index. “Manufacturing will grow at a modest pace this year” although it “is unlikely to accelerate in coming months,” LeBas said. “This is part of the slower expansion we’ll have in the second quarter.”’

As we keep saying, the Fed has not, is not and will not ever bring about a recovery. The recovery will happen on its own…when the economy is good and ready. And not a minute before.

All the Fed can do is retard the process of recovery…by depriving small and medium businesses of the real savings (credit) they need…by shifting resources from productive businesses to government and big zombie corporations…by making saving unattractive… by encouraging speculation, rather than genuine capital formation and long-term investment…and by increasing the total amount of debt in an already debt-drenched society.

None of this helps a recovery. In fact, it slows it down. It makes the economy weaker. Which is just great from the Federal Reserve’s perspective. If the economy did recover — even a little — inflation and interest rates would rise.

And then what? Then, as one central bank governor put it, the economy that went wild turkey would go cold turkey. It wouldn’t be very pleasant. The Federal Reserve couldn’t keep going with zero interest rates and bond buying — not with the CPI going up. It would have to cease and desist.

Mr. Bernanke & Co. would be stuck, trapped between the Scylla of a collapsing economy and the Charybdis of out-of-control inflation.

Their meddles would begin to look like big mistakes.


Bill Bonner
for Markets and Money

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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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