Why the Feds are Powerless Against an Economic Downturn

Okay, President Obama is a real, native-born citizen.

Whew! That’s cleared up.

But we never could figure out what the fuss was about. It didn’t make any difference to us where he was born. After all, you don’t have to be born in the USA to mess up an economy. Plenty of foreigners have done it. Plenty of Americans too.

Yes, dear reader, Mr. Market is an equal-opportunity disaster-maker. Men, women, Black, White…Jew or Gentile…it doesn’t matter. As you sow, so shall ye reap – no matter who you are.

Here’s the AP report on the latest US “growth” figures:

WASHINGTON (AP) – The economy slowed sharply in the first three months of the year. High gas prices cut into consumer spending, bad weather delayed construction projects and the federal government slashed defense spending by the most in six years.

The 1.8 percent annual growth rate in the January-March quarter was weaker than the 3.1 percent growth in the previous quarter, the Commerce Department reported. And it was the worst showing since last spring when the European debt crisis slowed growth to a 1.7 percent pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

But gas prices are still going up. The housing market has shown little signs of recovering. And lawmakers are proposing some of the steepest cuts in federal spending in a generation. Those cuts would filter down to state and local governments, which are already wrestling with their own budget crises.

“The economy has lost its modest upward momentum, and headwinds such as rising gasoline prices and further budget cuts suggest the recovery will continue at only a moderate pace going forward,” said Sal Guatieri, senior economist at BMO Capital Markets.

The stock market went up anyway. The Dow rose 72 points. Gold rose too – up $16. The dollar is still going down.

At this rate, gold will hit $1,600 in just a few weeks.

And stocks? They’re above the high set on January 14, 2000, when the Dow hit 11,723. But adjust for inflation…and they’re still way down.

The big downturn began in January 2000, not in 2007.

Since January 2001, neither America’s real GDP, nor its stock market, has registered any real gains. Oh…and neither has its workforce; there are no more people working today than there were 10 years ago; and they take home no more disposable income.

You already know about the stock market. As for the lack of growth in GDP, our old friend Jim Davidson points out that while the total GDP has grown…the portion that is attributable to private sector activity has not; it was almost stagnant. And this was while the population grew by nearly 10%. In other words, per capita private sector output has gone down almost 10% since the stock market cracked in January, 2000.

Which is a damned shame. Because it shows that the feds are powerless. Their “stimulus” tricks don’t work. The Bush administration responded to the little downturn of 2001 with the greatest counter-cyclical stimulus program since the Japanese bombed Pearl Harbor. If we recall the figures right, it went from a federal surplus of $200 billion to a deficit of $300 billion in one year’s time. Little good it did. The real economy did not grow. It just added debt; US federal government debt more than tripled over the 10 years.

The private sector was adding debt at a ferocious pace too. Together with public sector debt, total debt crested at over 4 times GDP.

Then, to meet the challenge of debt liquidation in ’07-’09, the feds added more cash, more credit, and more funny money. Even today, 11 years after the beginning of the downturn…and 4 years after the beginning of the insolvency crisis, they’re still pumping $36 billion per week in fiscal (deficits) stimulus and $25 billion per week in QE money-printing. And this doesn’t include their zero interest rate lending.

And what did all that accomplish?

The last time the Fed reported, it said growth in the US economy was on a “firmer footing.” Now, according to Ben Bernanke’s press conference talk-up, it’s just “moderate.”

What is he talking about? The economy is going nowhere. After 10 years of slipping backward at a slow rate, it’s now beginning to slide faster. The latest figures show the economy in the first quarter “growing” at barely half the rate of the previous quarter. And you have to adjust this growth – 1.8%, according to the official estimates – to population growth and to a real measure of inflation. The population is growing at about a 1% rate…leaving about 0.8% “growth.” But over the last 3 months, the same quarter we’re talking about, according to the Billion Prices Project real-time Internet tracking, prices rose at a 7.4% annualized pace. That means the Labor Department’s inflation adjustment – 2.1% – is only a third of what it should be. And it means the real economy is actually shrinking, per capita, at about 5.3% per year.

And keep in mind. It would be much worse were it not for mind-blowing inputs from the feds.

“That’s a confusing point,” Elizabeth noted yesterday. “You say the feds are doing the wrong thing. But you also say that it would be a lot worse if they didn’t do it.”

“Yes…it’s a paradox. But it’s true,” we explained. “If they’re willing to pump trillions more dollars into the economy, as Paul Krugman wants them to do, they can make it look like the economy is recovering. More people will have more money in their pockets. More people will have jobs. In the very short run, it will look better. Like a wartime economy. Or the Soviet economy.

“But the growth will be phony – built on government spending and unsustainable credit. Eventually, inflation rates will go up – making everyone poorer. Or the whole system will collapse into a much worse depression.”

The feds were able to create a huge bubble in ’03-’07. Now, they’re causing prices to bubble up again. But there is very little real growth. People are not earning more money. They are only barely increasing real output, not enough to keep up with population growth or with inflation. There is no recovery. Instead, the Great Correction continues.


Bill Bonner
for The Daily Reckoning