Does the Fed help make people better off? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 6 May 2013
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Baltimore, Maryland

Public life bumbles along under a combination of false pretenses and self-imposed delusions.

At the beginning of last week, it was widely reported that US central bankers had gone as far as they were willing to go. There were voices in the Fed, said the news, urging caution. There would be no further monetary stimulus measures, said the commentators.

Investors grew cautious.

Then, by the end of the week, investors were rolling the dice again. The Fed was working hard to fight the impression that it had either lost its nerve or recovered its senses. The New York Times:

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    More Forceful Fed Stands by Stimulus

    WASHINGTON - The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

    The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring.

    It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed's chairman, Ben S. Bernanke, have made the point repeatedly in public remarks.

With the wind of the Fed at their backs, investors put out full sail. On Friday, they were skimming along nicely, riding high on a tide of EZ money. "Don't fight the Fed," said the analysts. The Fed is pumping...stocks are going to rise.

Of course, it's not that simple. Zimbabwe pumped. Stocks rose...for a while. But ultimately, it takes more than cheap money to make businesses more valuable. And too much cheap money is contagious; stocks become cheap too.

Some investors are cynical about it. They know the Fed's easy money will have negative consequences for almost everyone. But they also know how the game works - money printing may be bad for the economy and the little guys, but it can be good for rich guys. They're the ones that own stocks!

Bloomberg:
    The world's 200 richest people added $44.6 billion to their collective net worth this week as the Dow Jones Industrial Average reached 15,000 for the first time.

    Alisher Usmanov, 59, whose fortune rose $61.2 million during the week, according to the Bloomberg Billionaires Index, said in an interview at Bloomberg's Moscow offices that he recently spent about $100 million buying Apple Inc (AAPL). shares in anticipation they will rise.

Cynical investors know it's a game. But a lot of people actually believe the claptrap. They think that the Fed - through some magic never fully explained or demonstrated - actually helps make people better off.

The Fed did not exist for the first million or so years that proto-humans have been walking on two legs. It is only in the last 100 years - a blink of an eye in evolutionary terms - that the Fed has been around...and only little more than half a century since it took up today's activist theories. And it's been scarcely only 4 years since it began to apply them so aggressively.

Is there any evidence that modern central banking actually makes things better? Has one sou or farthing been added to the world's wealth as a result of the Fed's policies? If so, everyone is keeping quiet about it...

Instead, central banks - namely the Fed - seem to have done something that most people would have considered impossible. They seemed to have stopped progress.

Maybe it's a coincidence. But it's as if time stopped dead when the Fed took up its role of improving the economy. If you adjust GDP to inflation and calculate it the way the federal government did when Jimmy Carter was president, you see that the real, disposable income of the average American has not improved since the first Eisenhower administration. That's more than 50 years, with no real economic progress...almost exactly the same 50 years in which the Fed has been so actively trying to make the economy work better.

Go figure.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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