Just Print More Money: The Easy Way to Manage and Economy

You can’t say it didn’t work. At least one of Mr. Bernanke’s aims was realized.

He went into the bond market, and bought US debt, in order to lower long-term interest rates. That was a bust. Long rates went up, not down.

He also wanted to raise inflation rates. No success there either; consumer prices are flat. The CPI is still registering the lowest increases since the ’50s…rising at about 1% per year.

Finally, Mr. Bernanke was counting on the “wealth effect.” He would put more money in speculators’ hands. They would bid up asset prices. People would feel wealthier. Presto! They would act wealthier – spending and investing more money and thus spurring the economy towards a full recovery.

Well, part of it worked. Asset prices went up. The Dow went up another 55 points yesterday.

Here’s Bloomberg’s report:

Republican leaders in Congress say they have “deep concerns” about Ben S. Bernanke’s second round of quantitative easing. The US stock and credit markets don’t share those reservations.

The Standard & Poor’s 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy. Junk bonds rallied, with the extra yield that investors demand to own the securities instead of government debt shrinking to 5.45 percentage points yesterday from 6.81 points, according to Bank of America Merrill Lynch index data.

“It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.”

“As people get more confident about the economy, money is coming into the stock market,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia. “The most important way quantitative easing works is the provision of liquidity.”

What? Liquidity? There’s no lack of liquidity. It’s solvency that the market lacks. Adding more credit (liquidity) just makes it worse.

But no point in telling Mr. Siegel or Mr. Bernanke that. They’re convinced that if they can just stuff enough new money into the system, everything will be all right. Isn’t that amazing? Just print up money. Just add cash. Just put in more paper money.

See how easy it is to manage an economy? Just print up more money…

Bill Bonner
for The Daily Reckoning

The Daily Reckoning