Plumbers Crack

Poor Ben Bernanke. There was a strange glow on his face as it appeared in Monday’s Financial Times…like a bearded St. Joan of Arc; his hands were clasped together as if in prayer, and his eyes seemed to reach up to the gods, if not beyond.

He made his reputation as a master plumber in Princeton, New Jersey, interpreting drippy money supply faucets and deconstructing clogged fiscal drains. And now, he has become the hope of all mankind. Or at least that part of mankind that hopes to get something for nothing.

How came this to be? The answer is simple. The plumbers who came before him botched the job. Applying their wrenches to the recession of ’01, they let too much liquidity into the system. Everything bubbled up. The subprime basement overflowed in ’07…Ben Bernanke has been on the job ever since.

And this week the financial world held its breath. It waited. It watched. Ben Bernanke was hunched over…sweat on his brow…easing on his mind. Commentators, economists, and the public wondered if he could really create new money…new wealth…out of thin air? If this were true, it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros…creating money – out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.

During the course of the last three years, the plumbers have spent hundreds of billions of dollars. It’s hard to know what the final bill will be, since so much money – more than $10 trillion – is in the form of guarantees and asset purchases. They’ve pumped. They’ve bailed. They’ve squeezed and turned. They scraped their knuckles and cursed the gods.

You’d expect they might think twice before spending so much money. But on the evidence, they haven’t even thought once. Quantitative easing has been tried before. Has it ever worked? Nope. Never. Do you dispute it? Give us an example.

Japan announced its QE program in the spring of 2001. The Nikkei 225 was around 12,000 at the time. It quickly rose to 14,000 as investors anticipated a payoff from the easy money. Then, stocks sold off again. Two years later the index was at 8,000. Today, it is still about 25% below its 2001 level.

Did printing money cause an up-tick in inflation? Not even. Core CPI was negative 1% when the program began. It rose – to zero – briefly…and then fell again and now stands at minus 1.1% after going down 19 months in a row.

America’s own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March of 2010, the Fed bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so’s you’d notice. The unemployment rate today is 200 basis points higher than it was when the program began. And despite the flood of cash and credit, core CPI in the US is still only a third of its level in 2008.

Of course, there are other examples where central banks printed money with more gusto. In Germany, during and after WWI, the nation’s real money – gold – was used to pay for the war and the reparations following. The central bank felt it had to create additional money – like the Fed – without gold backing. It added about 75% annually to the money supply, from the end of the war until 1922. By late 1923, the US dollar was worth 4 trillion German Marks. Still other examples – from Argentina, Hungary, Zimbabwe and elsewhere – are fun to read about. But they are not exactly the sort of thing you’d want to try at home either.

Even if Quantitative Easing were a precision tool in the hands of a skilled mechanic, it might be little more than a wooden club in Ben Bernanke’s dorky grip. This is the same man who missed the biggest credit bubble of all time! There is no evidence that he could fix a bicycle let alone the world’s largest economy. But there you have a more interesting question. What if economists were duped by their own silly metaphor? What if an economy were not like a bicycle? What if the gods were laughing at them?

Central planning and cheap fixes have been tried before. When have they ever worked? Give us an example. Perhaps an economy is too complex…like love or the weather…unfathomable…and largely uncontrollable, something you can make a mess of but not something you can improve.

We have no more information as to the fundamental nature of things than anyone else. A toaster oven is designed and built for a purpose. When it doesn’t work, it can be fixed. But an economy? Who built it? Who can fix it? It is an organic, evolving system…whose purpose and methods are infinitely nuanced. Does it let banks go broke? Does it back up once in a while? Does it permit falling house prices…high unemployment…and deflation? Yes…so what? Does it always do what politicians and economists want? No? So what?

It has a sense of humor too. Wait until it turns around and kicks the clumsy mechanic in the derriere!

Bill Bonner
for The Daily Reckoning

The Daily Reckoning