How Quantitative Easing Has Paralyzed the US Economy

Who can you trust?

Whoa… Big sell-off in stocks yesterday. The Dow down 242 points. Investors were worried…

…about new explosions in Japanese nuclear plants…

…about Europe’s periphery states on the verge of default…

…about revolutions, demonstrations and civil wars in the oil producing states…

…about this…about that…

But along comes the good ol’ Federal Reserve. It’s telling Americans not to worry. The economy is on a “firmer footing” it says.

Oh? Is it? We don’t think so.

But we’ll let the Fed tell its side of the story first. Here’s the report from Bloomberg:

Federal Reserve officials signaled they’re unlikely to expand a $600-billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane.

The economy is on a “firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said in a statement yesterday after a one-day meeting in Washington. While commodity prices have “risen significantly,” inflation expectations have “remained stable.”

Really? Is the economy on a firmer footing?

Well, let’s look at the evidence. On Friday, the numbers showed that shoppers were going back to the malls that once knew them. Sales figures showed the biggest rise in 4 months.

But unemployment is still “elevated,” with about 10% of the labor force out of work, depending on how you twist the numbers. Houses are still being foreclosed. And house prices are still going down.

And get this, the Michigan consumer sentiment index has dropped to 68 – only 4 points above its low set after Lehman went broke.

Odd, isn’t it? We mean, how is it possible that people who have no jobs…and whose main asset is falling in value…can spend more money?

Maybe this is the answer. Maybe Ben Bernanke’s program of QE – in which the Fed puts in $4 billion per day in an effort to boost stock prices – is paying off. Stocks went up. People felt richer. They spent more.

The Fed figures also show a modest rise in consumer credit – the first increase since ’08. Savings rates are also on the decline again.

But here’s another explanation: People are able to spend more because they’re defaulting on their mortgages. More than one in 10 mortgages is not being paid. That frees an enormous amount of money for other things.

It’s not the same as genuine, sustainable growth…but who cares about that?

Well, the point is, if the Fed is counting on a real recovery – so it can take away all the funny money it’s been pumping into the economy – it will probably be disappointed. The funny money has created a funny economy. The feds have been pumping in money at a record pace. Not only through quantitative easing…but also through deficit spending and ultra low interest rates. Rates have been close to zero for the last 27 months. And the deficit keeps growing.

But each time they bring out a chair, the economy forgets how to stand on its own two legs. Now, after years of sitting down…it is paralyzed.

At least, that’s our theory. If the feds take away their QE program – now scheduled to expire in June – the economy is likely to fall on its face.

The Fed says it will take away QE as planned. We say it will find an excuse to continue the program, if not immediately…after a decent interval.

So, who ya gonna trust? The world’s most famous and powerful economists? Or The Daily Reckoning?

The feds – who told you there was nothing to worry about in ’07…and besides, they said they couldn’t spot a bubble if it was stuck to their noses…?

Or The Daily Reckoning, who told you to duck?

Bill Bonner
for The Daily Reckoning