Is the US economy really booming? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 31 July 2014
Is the US economy really booming? A  A  A

Paris, France

Dear Diary,

The feds pulled a rabbit out of the hat. We had just been speaking with Simone Wapler, our colleague in Paris.

"I think it will come in lower than expected..." we told her. "And then it will be revised downward. Probably negative."

We were wrong. Instead, the number that the feds delivered yesterday surprised (us) to the upside. Four percent! Hey, that's almost like a healthy GDP growth rate. And they revised the first quarter up...from minus 2.9% to minus 2.1%. Not only that but the FOMC said it would continue tapering off its QE purchases, buying only $25 billion worth of bonds next month.

Well. What can we say? The feds were right. We were wrong. The recovery is real! The economy is booming! Central financial planning really works, after all! And now Janet Yellen can join Ben Bernanke and Alan Greenspan on the cover of TIME, as a great heroine, a Joan of Arc for the 21st century.

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Wait a minute. In theory, you can't create real growth by printing phony money ...and you can't fabricate real demand by giving it to people. And, in theory, you can't really create prosperity by jacking up the stock market or by putting more debt, backed by collateral that isn't really worth what they think it's worth, onto people who can't pay it back. And there's no theory that tells us we can increase real wealth without saving money...and applying it to new factories, machines, skills, and so forth.

Since it can't work in theory, we're suspicious. Maybe it didn't really work in practice either.

Is the economy really booming? Is it making people genuinely better off? Short answer: probably not.

But to fully appreciate what has happened we need to go back 7 years, to the fourth quarter of 2007. It was then that the credit machine was beginning to sputter. The mechanics at the Fed got out their wrenches and WD 40...and got to work. But they only really have one trick: they gave the thing more gas!

Lowering the fed funds target rate by 50 basis points, they claimed they needed artificially low interest rates to "promote moderate growth."

And for the next 7 the feds 'stimulated' the economy with this easy money. This is the same amount of time as it took Pharaoh to prepare for the lean laying in stocks of grain. And it's the same length of time as the lean years themselves.

Pharaoh's countercyclical program was a great success. The people of ancient Egypt beat the Old Testament famine. Fast forward 3,000 years, how is the Bernanke/Yellen team doing?

As we've been pointing out, there are 3.7 million fewer full time jobs now than there were before the stimulus began. Household incomes for 99% of the population are lower than they were in 2007. And the real rate of growth over the last 7 years has been just 0.9% per year. Adjust for a slightly higher rate of inflation and actual economic growth has been negative. Adjust for population growth, too, and the 'growth' disappears entirely.

Real hourly wages have not risen a penny. Business investment is still 20% below 2007. And 77 million people have overdue bills in collection.

This success, such as it is, was purchased, we remind you, by the biggest gush of liquidity since The Flood. All that cheap money has washed over the economy...seeped into every transaction...and warped and rotted every price signal.

But hey...GDP is growing at a 4% rate! (Subject to later revision, of course!) go girl!

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

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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