Economic Irony: Creating Bubbles to Maintain Stability

“Global Backlash Grows,” says The Wall Street Journal.

This is the backlash against Ben Bernanke’s crackpot money-printing scheme.

The foreigners don’t like it. Because the US is flooding the world with “hot money.” This fast cash chases oil, commodities, collectibles, farmland – just about everything.

It creates bubbles. It distorts markets. And it will certainly lead to busts and bankruptcies…and maybe to hyperinflation, too.

So, sit back and enjoy the show, dear reader. It’s the greatest show on earth. Yes, it will most likely lead to embarrassment and poverty in the US. Yes, the US dollar will cease being the world’s reserve currency. And yes, America’s leading economists – many of whom have won Nobel prizes – will be shown to be hapless goofballs.

But this is all good news to us. Under the leadership of modern US economists, Americans have been getting poorer for the last 10 years.

Why? How could that be?

With the encouragement of the Fed and Congress, Americans consumed more than they produced. “Go out and buy an SUV,” said a Federal Reserve governor. “Buy a new house,” said Fannie Mae. “Spend, spend, spend,” said mainstream economists.

Result: Americans have less real, net wealth than they had when this millennium began.

Now, finally, the average yahoo is wising up. He’s lost this job. And he knows he’s been played for a fool. But he’s learning. He’s defaulting on his mortgage…and he’s paying down his debt.

Consumer credit keeps contracting…it went down by $2.1 billion in September.

But the feds have kept at it. They tempted him with lower interest rates: the Fed brought its key rate down to zero; it can’t go lower.

The Fed also bought up worthless mortgage loans so he could borrow more cheaply and took over Fannie and Freddie so they could continue suckering people into a lifetime of mortgage payments. The latest word is that losses from Fannie and Freddie could reach to $363 billion through 2013, according to the Federal Housing Finance Agency.

But with Tea Partiers in the House…and the Fed hard up against the “zero bound,” what else could they do?

The Fed could print money! No need to ask Congress to pass spending legislation now. Forget what it says in the Constitution. The Fed can print money. And it can use the money how it sees fit – even funding an “off the records” stimulus program if it wants to.

Each dollar is, in effect, a liability of the US government…engaging the full faith and credit of the government and its taxpayers. But what law was voted on? What act of Congress authorized spending billions of dollars?

How came it to be that the taxpayers are on the hook for $600 billion more in financial responsibilities with no vote of their elected representatives? No point in even asking the question….

This is, after all, late, degenerate state-guided capitalism. If Congress can make citizens buy something they don’t want – such as health insurance – surely the Fed, which is a privately-owned bank, can write checks from the taxpayers’ checkbooks. Heck, nothing is too absurd.

So, the Fed goes boldly where no sensible person would want to go. It is trying – trying! – to create bubbles…asset bubbles, to make people feel like they have more money. If people feel richer, the feds reason, they’ll spend more money. Presto, we’ll be richer.

Are we beginning to rant and rave? Are we “losing it”? Is there a doctor in the house?


Bill Bonner

for The Daily Reckoning

The Daily Reckoning