Fed Announces Dollar Debasement. Markets Rejoice.

During yesterday’s trading session, the Dow Jones Industrial Average inched ahead 10 points to a new five-month high of 11,020. The financial news services attributed the advance to new disclosures from the Federal Reserve that it would continue debasing the dollar. True.

“Traders pushed shares higher Tuesday,” The Associated Press explained, “after minutes from the [September 21] Federal Reserve meeting kept hope alive that the central bank would take more action to stimulate the economy. The Fed had said…it was concerned that inflation was too low, and suggested it could step up its purchases of government bonds and take other action to encourage lending.”

That’s right; the guardians of the dollar’s purchasing power are concerned that they might not be debasing the dollar fast enough to “stimulate the economy.”

Such is the popular wisdom that guides America’s New Economy. Central bankers and politicians may still pay tribute to the traditional wealth-generation processes of capital accumulation and re-investment. But when these traditional processes fail to produce the desired short-term results, the shamans of the New Economy do not hesitate to implement the traditional wealth-destruction processes of debt issuance and currency debasement…and preferably, both at once.

Debt and debasement are essential, they argue, to stimulate the economy until the private sector re-establishes itself.

This theory is not without flaws.

The private sector has a very tough time re-establishing itself when the public sector is busy moving the goalposts farther down the field. Amassing debts and debasing the currency might produce a short-term economic benefit, but over the long term, such processes undermine wealth creation. In fact, the adverse effects are already evident. The US economy hasn’t produced a single net new job since 1998. At the same time, per capita wealth has barely budged over the last ten years.

Back in 2000, the US was the richest country in the world, based on wealth per adult. Ten years later, the US is clinging to seventh place.

High Average Wealth Per Adult

If we expand our top-down analysis to include ALL Americans, the national wealth picture becomes even more troubling. According to www.usdebtclock.org, Americans, on average, owe $52,501 in personal debt. In addition, each American’s share of the national debt totals about $176,173. Together, these direct and indirect liabilities total $228,674.

On the other side of the ledger, Americans, on average, possess net savings of…are you ready for this?…$979. Looking at these numbers, words like “insolvent” come to mind.

Eric Fry
for The Daily Reckoning

The Daily Reckoning