|QE is lethal. It kills.
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Dow down more than 200 points
on Friday. Bond yields still miniscule...but rising. Pundits guessing that the bond market might finally have turned around.
Gold down too...which makes no sense if you think bond yields are rising.
What's most amazing is that bond prices are falling (as yields rise) even as the Fed spends $85 billion a month to keep them up. What's wrong with QE and ZIRP? They don't seem to be working.
Worse than that...they're lethal! No kidding. QE KILLS. But where were the health warnings?
On Thursday, we reported on a remarkable opinion published by the Wall Street Journal. The subject? "How austerity kills." The idea is that austerity measures cause people to lose their jobs and their social welfare benefits. They get depressed, goes the argument. Then, they commit suicide.
The article musters some statistics and lays out a few corpses to prove its point. But if European austerity policymakers are guilty of manslaughter so are the American stimulus mongers. If the US economy had followed the same path of recovery following the recession of '09 that it followed after recessions in the '80s and '90s, there would be 3 million more people with jobs in the US. Surely some of the people who blew their brains out in the last 4 years were the same people who had one of those jobs that didn't exist. And we know where to put the blame - at the Ben Bernanke's doorstep.
As we come to understand how QE works...and see what it actually does...we also come to realize that it is a bum policy from almost any angle that you look at it. The qualifier 'almost' is important. Because if you are a stockholder, a banker, or a zombie...you will probably have found QE I, II, III rather agreeable. Pumping money and credit into the banking system has done wonders for stock prices...and apparently to housing prices too. But these stimulus policies have actually retarded a real recovery.
As we pointed out yesterday, in the US the private sector is still 3/4s of the economy. If the private sector isn't hiring, it is almost impossible for the feds to pick up the slack.
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With all this cheap money around, you might think businesses would be hiring. But no. Part of the reason is that they have limited access to credit. True, the rates are low. But the money goes to the government. Small and medium businesses - the ones that hire people - don't get it. David Malpass in the Wall Street Journal:
Private investment drives economic growth. The policies currently labeled as "stimulus" and "austerity" are failing because both policies reduce private investment, contracting both the means and incentive for private citizens to invest in their futures."
In the US, the private sector is still about 3/4 of the economy. If the private sector is not saving and investing the economy it will not grow.
"Stimulus" policies increase deficits and allow the feds to spend more money. Economists such as Paul Krugman and Larry Summers (leading candidate to replace Ben Bernanke) think more government spending creates jobs...and boosts GDP. What it really does is only to transfer resources from the private sector to the public sector. You may get more government jobs...and a higher GDP, but no real recovery and no real prosperity. As far as we know, no society in history has ever prospered by putting more and more of its capital in the hands of politicians and bureaucrats.
"Austerity" advocates, on the other hand, generally attempt to decrease deficits by increasing taxes. Unless there is a big simultaneous cutback in government spending, austerity doesn't either, because it leaves society's resources under the control of politics.
A few days ago, the New York Times, publisher of Krugman and Friedman (Tom), had a big article about "How austerity kills." The idea was that austerity causes people to lose their jobs and then they blow their brains out. Without the soft, cuddly embrace of government employees, say the authors, people have no reason to live:
Private sector credit grew only 0.8% from the end of 2008 through the end of 2012, whereas credit to the government grew 58%.
Mr. Malpass also explains why consumer prices have not gone up, even as the Fed adds $85 billion per month to the nation's financial footings. Instead of adding to the banks' lendable reserves, QE adds only to their "excess reserves," which are not lent out by the banking system and not magnified by the fractional reserve system.
The effect of the policy is merely to keep borrowing costs low for the government and major financial institutions. The big boys get the money. The middle class, the job-creators, the wage earners, and the entrepreneurs do not. Result? No recovery.
Speculators make money from rising stock prices - which are up about 130% since 2009. Real median income, though, is still down 5% in the 4th year of what should be a 'recovery.'
If an economic calamity causes people to pull the plug on their own lives this one should save a lot of electricity. And so it seems to. More people died from suicide last year than from automobile injuries.
Where are the tort lawyers? Where is Johnny Cochrane? (Dead). Where is Oriole owner Peter Angelos? Where are the class action shysters when you need them? You'd think these guys would be all over this.
They squeezed billions out of tobacco and drug companies. In the case of tobacco, the potential for harm to the user was well known and could have easily been avoided. (Stop smoking!)
But what about the Fed's QE and ZIRP? Which one of these poor, unfortunate suicides traced his misery to Fed policies? Where was the consumer warning?
QE and ZIRP may cause severe job loss and depression. Consult your lawyer and bartender before believing anything Fed officials, economists or other jackasses may say about it.
Let us spell out the Cause of Action for those lazy attorneys:
The Fed deliberately manipulated interest rates...and intentionally diverted billions of dollars from the real economy to government, the rich, Wall Street, the banking sector, and speculators.
The Fed undertook these policies and is thus responsible for the consequences of them. Chartered by the US government, the Fed has a responsibility to maintain full employment. And it has a responsibility to inform itself of the likely consequences of its actions. Fed governors knew or should have known that this would slow real savings rates and lower real employment. It also knew, or should have known (at least according to the Wall Street Journal opinion piece) that this would result in mental depression, one of the probable outcomes of which could be suicide.
C'mon you ambulance chasers. Get on the case!
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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