Tapering on the Tapering Off - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 December 2013
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Baltimore, Maryland

Tomorrow is the big day. Investors are on the edges of their seats, waiting to find out what the Fed will do. Taper? No taper? Or maybe they will taper on the tapering off?

Our guess is that the Fed will not commit itself to a serious program of reducing its support to the equity markets. It's too dangerous. Ben Bernanke won't want to see the stock market collapse just before he leaves office. He'll want to go out on a high note. And that means guaranteeing more liquidity.

Investors don't seem worried about it. Yesterday, stocks were up 129 points on the Dow. Gold was up $10.

Most of the reports we read tell us that the economy is improving. They see unemployment going down and GDP going up. Compared to Europe, America is a power-house of growth and innovation, they say. Compared to emerging markets, it is a paragon of stability and confidence.

How much do investors love the US? Let us count the ways:

In the US, GDP per capita is running 7% ahead of 2007. Among the world's major developed economies, only Germany can boast of anything close. All the rest are falling behind.

The US deficit is in decline. Now, at only 3% of GDP, it is no longer scaring away investors; it now attracts them. There is no reason to fear public debt in the US.

Unemployment is going down too. Heck, now fewer than 7 out of 10 people are jobless. Didn't Ben Bernanke say he would tighten up when it hit that level?

And look at prices. Consumer price inflation in the US is running at only 1.8%. Nothing to worry about there.

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But wait. What if all these things were delusions...statistical folderol...or outright lies? What if the true measures of the economy were feeble and disappointing? What if the US economy was only barely stumbling and staggering along?

Well, dear reader, you surely expect us to tell that the US economy is a hidden disaster...and we won't disappoint you.

GDP? Carmen Reinhart studied the performance of rich economies following a financial crisis. Her paper, entitled 'After the Fall,' showed that 6 years after a crisis, per capita GDP was typically 1.5 percentage points lower than in the years before the crisis. In the US, however, growth is running 2.1% lower - significantly worse than average.

Deficits? Super-low interest rates have helped debtors everywhere. "Never have American companies brought a greater share of their sales to the bottomline," writes Bill Gross. How did they do that? Largely by taking advantage of the Fed's interest rate suppression program. But hey, the US government is the world's biggest debtor. It is the primary beneficiary of the Fed's miniscule rates. That's why deficits are low. Let rates return to a 'normal' 5% and we'll see deficits soar again.

Besides, it's not the deficit, per se, that counts. It's the total debt...and particularly the debt financed with funny money from the Fed. Only twice in US history has the ratio of US Treasuries held at the Fed gone over 10% -- once in 1944 and again today. The first time, it was an emergency...in WWII. Now, the feds are merely fighting to protect a credit bubble.

Inflation? Yes, inflation rates are low. But what it shows is that real demand is still in a deleveraging trough. The money multiplier - the ratio of money stock to the monetary base - collapsed in '08. It has not come back. Neither has the economy.

Unemployment? The rate has been doctored by removing people from the labor pool. The workforce is now smaller - as a percentage of the eligible pool - than at any time since 1978. Besides, what is important is not the rate in itself, but what people get from employment. On that score, it is a catastrophe. According to a Brookings Institution study, the average man of working age earns 19% less in real terms today than he did during the Carter administration!

What kind of economy is it that reduces a man's wages over a 43-year period?

We don't know. But it's not likely to win any prizes.

But why, with so many strikes against it, does the US economy still have the bat its hands? It's because the feds have pumped up corporate profits and asset prices so much that the averages look pretty good, masking the ugliness beneath them. GDP per capita, for example, may be up 7%. But the extra output was not distributed throughout the economy. The rich got richer on the Fed's EZ money. But the average "capita" is actually poorer.

The bottom 90% of the population - people in 9 houses out of 10 - have 10% less income than they had 10 years ago. This is not a success story.

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

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