World-Upside-Down Glasses

“Have you seen any of the last few days’ economic data?” an amazed reader asked in an email this morning.  “Can you say, ‘depression?’ It’s unbelievable.

“Unemployment claims at an 8-month high,” the reader continued. “Rolling 4-week claims at a 6-month high. Home prices have now officially ‘double dipped’ to where they are now below the March 2009 lows…with more than a third of the market in REO’s (Real Estate Owned by a bank) as a result of previous foreclosures.

“And just for good measure,” the reader winds up, “the Financial Times reported this morning that Mexico bought 100 metric tonnes of gold in the first quarter.  Mexico!  Can you imagine a world in which the land of the peso doesn’t want to own dollars?!!  I’m at a loss for words, as ‘unbelievable’ seems too weak.”

We, too, are at a loss for words…But that never stops us from writing thousands of them every day in this column.

What the reader calls unbelievable is actually quite believable…as long as you’re wearing your world-upside-down glasses. With the glasses on, any idiot can plainly see that the best way to achieve economic prosperity is to spend more than you save, borrow more than you produce, and print up currency that no one has earned. There’s nothing unbelievable about it. But don’t take those glasses off.

If you do, you might start to see things those nasty skeptics and doomsdayers see…and you might start to doubt that a nation can impoverish itself to prosperity.

Furthermore, you might start connecting inconvenient data points…like the rising prices of goods and services, coincident with the falling value of the dollar. Or like trillion-dollar annual deficits, coincident with elected officials who strain to make $80-billion dents in those deficits.

If you like charts – and aren’t wearing those glasses – you might infer a connection between the Fed’s massively expanding balance sheet and the stock market rally of the last two years. The nearby chart, which will also appear in Chris Mayer’s excellent column below, suggests a connection between the Fed’s money-printing and the run-up in stock prices.

For most of the last decade, the Fed maintained balance sheet assets of roughly $650 billion to $850 billion. But shortly after the credit crisis hit, Ben Bernanke’s team fired up the printing presses and began spewing dollars into the banking system through a variety of mechanisms – the most infamous of which is “quantitative easing.”

You all know the story by now. It goes like this:

1) Tell the public there is a crisis that only the Fed can cure;
2) Tell the public that the Fed’s cure is to print dollars and buy Treasury securities.
3) Tell the public that this counterfeiting scheme is “measured” and “economically sound.”
4) Start printing money and buying Treasury securities.
5) Buy so many Treasury securities that you absorb 100% of the Treasury’s net new debt issuance.
6) Continue telling the public how clever this QE stuff is, even though the dollar is tanking, commodity prices are soaring and economic activity remains moribund.

With the glasses off, Bernanke’s QE program looks like a huge failure, bordering on a disaster. But hey, at least the stock market is a lot higher…for the moment.

The Daily Reckoning