The Successful Failure of US Money Printing

Dow down again – 25 points. Gold up again, $7. And oil still below $100.

Inflation worries up, in other words.

Economy down.

And now it’s official. QE2 is a FLOP! See below…

To hear the papers tell it, US stocks are being weighed down by troubles in Europe. Here’s the report from The New York Times:

Sovereign debt concerns and the prospects for slower growth in Europe and Asia took their toll on global markets.

Analysts said recent news from Europe had not instilled confidence in the Continent’s ability to handle its fiscal challenges. Last week, Fitch Ratings downgraded Greece’s credit ratings by three levels to B+, a rating that is below investment grade. Standard & Poor’s lowered its outlook on Italy’s debt to negative from stable over the weekend, citing a weaker outlook for growth and lower prospects for the country’s ability to trim its debt.

Yeah. The problems are all in Europe. If it weren’t for the Greeks, and Italians, and Spaniards…it would be clear sailing here in the US.

But the main difference is probably that the Europeans don’t cheat as much as we do. For example, unemployment in Spain is terrible, at 17% according to the figures we saw for March.

But wait, Yale economist Robert Shiller says unemployment in the US is miscalculated. It’s really almost 16%. Not much difference with Spain.

Meanwhile, fire off a gun in Las Vegas and you’re going to hit a homeowner who is underwater. Almost 3 out of 4 of them are below the surface. And get this…house prices are dropping at the rate of about 1% per month, according to the aforementioned Mr. Shiller.

The Spaniards also have to own up to their problems. They can’t print money. They’re on the euro, a currency controlled by the European Union…which is to say by France and Germany.

You may say, being on the euro ‘limits Spain’s policy options’. You may say that Spain is in a ‘straitjacket’ put on it by the larger economies of the Union. You may say that Spain would have an easier time of it if it still had the old, more flexible Spanish peseta.

You would be right. But you would be a moron.

The whole point is that there are some things that it is better NOT to have the easy, fun, devil-may-care option. Ask Dominique Strauss Kahn. Ask Arnold Schwarzenegger.

Take DSK, for instance. We’ll bet he wished his wife had accompanied him on his business trip. If so, he might still be head of the IMF…diddling poor countries, rather than poor chambermaids!

Yes, dear reader, there are some options you’re better off without. Printing money – with nothing to back it – is one of those things.

But wait. You say the Fed’s money printing (otherwise known as QE2) has been a success? Think again. We’ve been saying for months that it won’t work. Now, even the mainstream press is catching on. Here’s the latest report from The Wall Street Journal (MarketWatch):

BOSTON (MarketWatch) – It’s cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke’s huge financial stimulus package, known as “Quantitative Easing 2,” actually worked as planned? QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy “moving in the right direction.”

But an analysis of the real numbers tells a very different story.

Turns out the program has created maybe 700,000 full-time jobs – at a cost of around $850,000 each.

House prices are lower than before QE2 was launched. Economic growth is slower. Inflation is higher.

Yes, it’s sparked a massive boom on the stock market. Ordinary investors have started piling back into shares again. And last week we saw the latest example of the return of animal spirits on Wall Street, as stock in new dot-com LinkedIn skyrocketed on its debut.

But even the stock market boom hasn’t been what it appears. An analysis shows that most of the rise in the Standard & Poor’s 500 Index under QE2 has simply been a result of the decline in the dollar in which shares are measured.

The truth? QE2 has created a massive new bubble in dollar-based financial assets, from stocks to gold. Meanwhile, it has had zero visible effect on the real economy.

Take jobs. According to the US Labor Department, since last August the number of full-time workers has gone up by just 700,000, from 111.8 million to 112.5 million.

At a cost of $600 billion, that’s $850,000 a job.

The picture’s even more meager. Over the same period, the number of part-time workers has gone down by 600,000. In other words, we’ve basically shifted 600,000 or 700,000 workers from part-time jobs to full-time jobs.

The percentage of the population in work is actually lower today – 58.4%, compared to 58.5% last August. The percentage of the workforce in actual work, the so-called “participation rate,” has fallen by half a percentage point.

Some recovery.

Right. Some recovery.


Bill Bonner
for The Daily Reckoning

The Daily Reckoning