The US is harming emerging markets - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 16 October 2012
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Paris, France

Geez. Where do we start?

So much nonsense in the news this morning, we hardly know what to laugh at first.

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How about this?

TOKYO (Reuters) - The Federal Reserve chairman, Ben S. Bernanke, defended the central bank's monetary policy on Sunday from claims that it was hurting the economies of emerging countries.

Mr. Bernanke has often defended Fed actions against domestic critics, who argue the policy of keeping interest rates near zero while ramping up asset purchases hurts savers and risks future inflation.

But in a speech here, he addressed critics abroad by saying that stronger growth in the United States bolsters global prospects as well, countering the likes of Guido Mantega, the Brazilian finance minister, who has labeled the Fed's latest stimulus effort "selfish."

Critics say the Fed's unorthodox policies weaken the dollar and bolster the currencies of developing countries, hurting their ability to export.

"It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies," Mr. Bernanke said at an event sponsored by the Bank of Japan and the International Monetary Fund.

"This policy not only helps strengthen the U.S. economic recovery, but by boosting U.S. spending and growth, it has the effect of helping support the global economy as well," Mr. Bernanke said. Mr. Mantega told the 188 member countries of the monetary fund here on Friday that the policy was selfish and harming emerging markets by stealing their share of exports and by spurring destabilizing capital flows and currency movements.

Of course, Mr. Mantegna is right. The idea of the Fed policy is to lower the dollar and raise the 'animal spirits' that lead investors to take chances and consumers to take down inventories...and not coincidentally to allow the world's biggest banks to make billions in undeserved profits. Just look at the bank stocks...they're headed back up.

The Financial Times:

"Citigroup leads banks higher after beating earnings forecasts"

Why are the banks doing well? The Fed is handing out money. And they're first in line.

And here's the Fed's newest governor falling in line:

In his first public remarks since joining the Fed in May, Stein, a 51-year-old Harvard economics professor, said he firmly supported the Fed's announcement last month that it will buy $143 billion of mortgage bonds through the end of the year in an effort to reduce already record-low interest rates. He also supported the Fed's decision to declare that it would continue to try to lift economic growth for as long as necessary to meaningfully reduce unemployment.

Bond purchases, known as quantitative easing, "have played a significant role in supporting economic activity," Stein said in remarks at the Brookings Institution. Research, he said, shows that past asset purchases have brought down interest rates by up to 1.2 percentage points, leading to a drop in unemployment.

Yes, Mr. Stein, on behalf of Goldman Sachs, JP Morgan, Citi and all the rest...not to mention the world's stock and bond holders...we thank you!

The whole spectacle would be only absurd if it weren't also very amusing. The Fed can't actually bring forth more resources, more real capital, more skill, more jobs or more output. It can only put out more paper money...give it to their friends...thus cheapening the money that everyone else holds. That lowers the real value of American wages and the real price of US exports. It makes it more attractive to buy from the US than, say, Brazil. So, the policy does exactly and only what Mr. Mantegna accuses it of doing.

But once you get going in a hopelessly wrongheaded direction, keep going! That's the message this morning from Larry Summers, also in the Financial Times.

Mr. Summers does the usual moaning and whining. World output is $1 trillion lower than in 2007, he points out. The US economy is headed over a fiscal cliff. Europe doesn't have a clue. Japan is stagnant.

What to do?

Ha..ha..ha... The "demand support view"...he says...would be a means of "jump-starting economic growth and setting off a virtuous circle in which income growth, job creation and financial strengthening are mutually reinforcing."

Jump-starting? Virtuous circle? C'mon Larry, you can do better than that! How about 'priming the pump?' That was always good for a chuckle.

Yes, the manipulators are falling back on the old, worn-out cliches and metaphors from half a century ago. Too bad they don't go back a little further. They would find some economists who really knew what they were talking about.

This from John Stuart Mill in 1844:

The usual effect of the attempts of governments to encourage consumption is merely to prevent saving; that is to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means that were intended to increase it. What a country wants to make it richer is never consumption, but production. Where there is the latter, we may be sure there is no want of the former.

And where there isn't the latter - no savings, no capital formation, no productive investment - there won't be any of the former either. That's why wages are not rising...household incomes are dead in the water of a 20-year period...and real consumption by the middle classes (as opposed to those who get the Fed's counterfeit money) is going down.

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

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