Why Printing Money Won’t Correct the Correction

Well, dear reader, you know the story as well as we do.

“US Stocks Rise as Fed Announces Additional Treasury Purchases,” says Bloomberg.

US stocks advanced, with banks helping benchmark indexes erase losses, after the Federal Reserve announced an additional $600 billion of Treasury purchases through June in a bid to boost growth in the world’s largest economy.

The S&P 500 climbed 0.4 percent to 1,198.03 as of 3:16 p.m. in New York. The measure had fallen as much as 0.8 percent. The Dow Jones Industrial Average added 26.64 points, or 0.2 percent, to 11,215.36.

“Nothing in here tells me that we should be selling stocks,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “The latest economic figures have been good. We have the Fed and the elections behind us. So there’s less uncertainty.”

The S&P 500 surged 17 percent since July 2 through yesterday as odds increased that Republicans would take control of the House. The GOP, while falling short of winning the Senate, narrowed the chamber’s Democratic majority yesterday in an election shaped by voter anxiety over jobs and the economy.

Republicans gained at least 60 House seats across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.

The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.

What? Does he just make this stuff up? Maybe stocks will go up. Maybe they’ll go down.

We don’t know. And we don’t care. Stocks aren’t cheap. And the country is still at the beginning of a major adjustment…a Great Correction that will probably depress business profits for many years.

Besides, the stock market never has completed its historic rendezvous with the garbage pile. Yes, every investment asset class goes from the trash heap to the penthouse – and then back. By our calculations, US stocks are on the downside of that slope. We’ll wait ’til they reach the dump – that is, when they’re at giveaway cheap prices – before we get excited about them again. We want to pick them out of the trash at pennies on the dollar.

Of course, we could wait a long time. From trough to peak typically takes 16 to 20 years. If you take the peak as of January 2000…when the NASDAQ hit its high…we have another 6 or so years to wait. But if the peak was the peak in the Dow of 2008…heck, we could wait until 2028 until we finally hit bottom.

And don’t forget. Japan waited 20 years between its glory days of 1989 and its low of 2009. We could do the same. But so what? We can wait….

But let’s talk about happier things. This year the voters – God bless ’em – threw out more bums than usual. The Republicans gained 60 house seats.

That means Congress is gridlocked. Obama doesn’t seem to understand what is happening. And Ben Bernanke is cranking up the presses.

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.

And more thoughts…

Here’s Bloomberg on the subject of QE:

The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the US economy.

The Fed today will probably restart purchases of bonds to spur the economy even as growth is likely to accelerate at a 2.6 percent annual pace in the second quarter of next year from 2 percent last quarter, according to Bloomberg News surveys of economists.

“By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake-up in currency and bond markets,” said James D. Hamilton, a University of California, San Diego economist.

“That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,” said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. “So the Fed has a careful tightrope act here.”

Since December 2008, the Fed has kept interest rates near zero and used asset purchases to try to stimulate growth following the worst recession since the 1930s. New asset purchases would follow Fed acquisitions of $1.7 trillion in Treasuries and mortgage debt that ended in March.

*** And here’s an item from Reuters’ “Business Banking News:”

“Wealth managers want to wean investors off gold.”

What? Wealth managers are a threat to your wealth. No doubt about it. The US government runs $3 trillion of deficits since the end of ’08. The Fed prepares to print $600 billion more, on top of the $1.7 billion it printed a year ago. In this situation gold is about the only thing you can depend on. It might go up. It might go down. But it won’t go away.

And it will be here long after the US bond market collapses and the US dollar disappears.


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

Latest posts by Bill Bonner (see all)

Leave a Reply

4 Comments on "Why Printing Money Won’t Correct the Correction"

Notify of
Sort by:   newest | oldest | most voted
The Americans should have thrown out more Republicans, god bless em, with the Democrats totally in control so that they could pass all their legislature they wanted. Then you would see all the things the daily reckoning constantly endorses. Reducing deficits, more money spent on productivity rather than just war and cooperation between the BRIIC nations in partnerships which could allow some job growth and production capacity for the US. Obamacare reduced the cost of medicare, something I see rarely recognized. Why would you be happy about Republicans gaining so many seats? The only thing this accomplishes is preventing progressive… Read more »
Ned S

China could be in the market to do some expansion this century??? – Like the US did in the 1800s – So Obamaland might sound vaguely useful as their 35’th province somewhere down the track? Providing the US doesn’t stuff its economy TOO irredeemably in the interim? :D

Daniel Newhouse

Obamacare is a deliberate attempt to put private healthcare out of business and/or make it more unaffordable to more people so there is more demand for health insurance provided by the government.

If Obamacare had a shred of honesty, it would have at least allowed people to purchase insurance from other states.

If the goal of the Democrats were not an eventual single payer system, they would allow healthcare providers to charge users of Medicare and Medicaid more than what those programs pay for a given service like Australia’s government does.

Daniel – do you mean private insurance if you earn above a certain amount? As for having a shred of honesty, that sounds extremely conspiratorial. Are you totally sure that the reason insurance is not allowed to be purchased from other states is because of the plan by Obama to make it a single payer system? Or is there another answer which is both plausible and sensible that you can think of or research to find out about such a possible case? It’s mainly to do with the constitution disallowing the federal government form interfering with state provisions such as… Read more »
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