The Dow jumped 292 points yesterday. Investors took to the Fed’s announcement like children to Santa Claus.
They rubbed their eyes and saw a big present under the tree: No real tapering… no time soon.
Said Ben Bernanke, “Highly accommodative monetary policy remains appropriate.”
Our friend David McWilliams – one of the few Irish economists to see the big bust in his country coming – has created a video explaining what a scam the Fed’s QE is (comparing the Fed to terrorist kidnappers).
It’s like Obamacare and the War on Terror – designed to shift wealth from the hoi polloi in the public to the insiders favored by the feds.
And yesterday, the Fed announced that the scam would continue. In a typical sleight of hand, it took its monthly asset buying down from $85 billion to $75 billion… but also told us that zero-bound interest would keep flowing for even longer than expected (“well past the time that the unemployment rate passes 6.5%,” whatever that means).
As a card-carrying, asset-owning and secret-handshake-giving member of the 1%, we’re delighted to know that the filthy lucre will continue coming our way. But as a financial philosopher we find the whole show rather shabby and tawdry.
Not only does the program shift income from the public to the insiders, it also masks the real problems in the economy and stifles real corrections.
Why the Low Inflation?
Yesterday’s Wall Street Journal worried that: “Low Inflation Tests World’s Central Banks.”
Most people like falling prices. They’re happy they can buy more of what they want for less of what they have. But central bankers and economists take falling prices as a problem in need of a solution. Without rising prices… how will they keep the scam going?
Central banks rely on inflation to keep the economic pot boiling… and to roast the public. Higher prices lure consumers to spend, rather than save. Rising prices reduce the value of wages and earnings. Lower real labor costs coax business to hire more people… improving employment and consumer spending.
Falling prices, on the other hand, are a menace. They raise real wages… and induce households to save rather than to spend. That’s why the central banks are trying to get inflation levels back up. Disinflation interferes with their “borrow, borrow, borrow… spend, spend, spend” fantasies.
Consumer price inflation in the US has been on a downward course for 33 years. Now, prices are rising at the slowest pace since 2008 – itself the lowest level in more than half a century.
In November, core annual consumer price increases came in at just 1.2%. In Europe, the figure is even lower – below 1%. And Japan has been struggling with deflation for years. The Japanese feds have pledged to get inflation up to 2%. So far, they are only “halfway there,” according Haruhiko Kuroda, who runs the Bank of Japan.
Why the low inflation?
Nobody knows for sure. But it is probably a combination of things; aging populations in the developed world and low-price output in China are frequently mentioned.
Rise of the Teetotalers
Less often mentioned is the interference of policymakers in markets and economies.
As we noted yesterday, by scamming the public and moving more wealth to the rich, the feds take money out of the hands of thirsty drinkers and give it to the teetotalers.
Rich people don’t spend more when they get their hands on more of the stuff. They already have the houses, TVs and automobiles they want. Taking money from the lower 90% and giving it to the upper 10% reduces demand… and holds prices down.
Also left unmentioned is the effect of low interest rates on earnings. Savers – especially retirees – spend much of the interest they earn. Shaving interest rates leaves them with less money to spend.
And the punky, sluggish economy is also a product of the fed’s refusal to allow a genuine correction.
Most important, it leaves Americans with fewer good jobs and lower wages.
This is where the scam really hurts. As we reported in these pages, look at 10 American households at random. Nine of them have less money to spend today than they did 10 years ago. And the typical man of working age has suffered even more.
According to the Brookings Institution study – reported here a few days ago – his real wages are now below 1964 levels. Here are the important figures: In 1974, the average man earned nearly $350 a week in constant 1982 dollars. Today, the figure is close to $290.
Ouch!
Want to know why prices aren’t rising as fast as the Fed wants them to? The answer is simple: Most people don’t have any money to spend.
Who’s to blame? More than anyone, the feds themselves.
Regards,
Bill
Market Insight:
Money for Nothing
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
There’s a new documentary out about the Fed.
It’s called – appropriately – Money for Nothing. I highly recommend you go see it. Or download it here.
One of the interviewees is former NY Fed, Bank of International Settlements and Department of the Treasury insider Peter Fisher.
Talking about the role of the Fed under Alan Greenspan and Ben Bernanke, Fisher makes an observation few market participants seem to have made. According to Fisher:
Capitalism doesn’t work too well when money is free. And when it’s free for too long we corrupt the system.
Investors have short memories. They see Bernanke as “the hero” of the 2008 crisis. But they fail to see the role of Fed policy in laying the groundwork of that crisis… or Bernanke’s role of failed regulator (refusing to tackle the subprime mortgage problem) in the run-up to the housing bust.
Yesterday, investors cheered the Fed’s decision to extend its money for nothing policy “well past the time that the unemployment rate passes 6.5%.”
The Dow and the S&P 500 soared. Gold plunged.
Despite its record of promoting bubble-and-bust economics, the majority of investors believe the Fed can do no wrong… and that money for nothing is a panacea for all that ails us.
History says differently…
The dot-com crash… and the housing bust… are testament to that.
Our advice: When buying stocks, focus on buying when prices are cheap relative to underlying values. And remember that Fed officials often err… often with catastrophic consequences.
