|Half a trillion dollars but a lousy 2% gain
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What? A half a trillion dollars and all we got was a lousy 2% gain in the S&P?
We've come to the charming little town of Kilkenny, Ireland, to take part in "Kilkenomics." What, exactly, that means...we don't know. We just got here.
Yesterday, the Dow lost 152 points. Gold lost $9. QE continues.
Our side-kick, Chris, has been explaining why all this QE doesn't lead to higher consumer prices - at least not directly. In short, it's because the money gets locked up in 'excess reserves,' that can't be lent out and don't feed directly into the money supply.
That would explain why we haven't seen much of what we typically call 'inflation' recently. It also explains why QE doesn't 'work' - even on its own twisted terms.
First, let's look at what QE is really doing: shifting huge amounts of money from the productive sector to the zombies.
***Savers have their earnings clipped by artificially low interest rates. But zombies - most importantly, the government and all its clients - get money at unusually low rates.
***The financial sector is getting richer, too. Stockholders and speculators are making money...even as the economy itself is limp and real earnings (taking out artificially low interest expenses) are poor. The stock market is near an all-time high...while wages and disposable family incomes slump.
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The averages disguise what is really going on. Yes, the rich are getting richer. But 90% of the population has less wealth today than it had in 2007. The bottom half has 44% less household net worth than they did then.
***Yesterday, the Financial Times reported that bonuses on Wall Street would be about 5% above those of a year ago. Hey...how do you do that? How do the financial sector earnings go up at twice the rate of the GDP? Oh, you know very well...it's because the Fed is depressing interest rates...forcing people to become speculators...increasing 'trading' by stock market investors...and coincidentally increasing Wall Street earnings!
But what QE is NOT doing...so far...is lighting a fire under the economy itself. If the economy were warming up, you'd see prices rising. But we see no such thing...(making an allowance for the fact that the numbers from the BLS can't be trusted for a minute). The latest reports show consumer price inflation going down, not up.
Check out the commodities. After hitting a high in April of 2011, the CRB has been down, down, down...more than 25% down. And the official CPI is only 1.2% -- substantially below the Fed's target.
And look at what is happening in Europe. The rate of consumer price inflation has just fallen to 0.7% -- the same as Japan. In fact, it is back to levels seen in the depths of the deflationary de-leveraging of 2009.
Even at boosting asset prices, QE is proving less and less effective. Since May, the S&P is up two percent. But during that time, the Fed put $500 billion into its QE program. What? A half a trillion and all we got is a lousy 2% gain?
Hmmm...what to make of this?
First, forget about tapering off. Instead, think of tapering on. How about this as a possibility? With no more earnings from low-interest refinancing...no new demand from household incomes...and no pricing power - corporate earnings begin to fall. QE or no QE, stock prices fall. The Fed panics. It will be confronted with both dropping asset prices and disinflationary (possibly deflationary) consumer prices. It will have to find a way to ramp up the QE program so that it puts dollars more directly into the economy.
Second, this new push - if it comes - might very well send stocks soaring again. There's nothing like free money to make investors happy.
Third, of course, the whole thing is doomed. You can't really increase real incomes or the real value of businesses by pushing down some prices (interest rates) and pushing up others (asset prices). All you can do is make a bigger mess of things...creating a bubble, which inevitably blows up in a bigger way.
But how does it work, exactly? When does all this QE...low rates...deficits...pulling, prodding and pinching the economy...when does all this nonsense finally go 'BOOM!'?
Hey, dear reader, do you have us mixed up with someone who actually knows something?
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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