Before the music stops

What’s that sound? Helicopters?

The summer is slipping away fast. In the morning, mists hang over the fields. The chestnut trees have already turned a rust color. And we start a fire in the kitchen fireplace to keep our mother warm.

It wasn’t much of a summer in Europe this year. Still, we’re sorry to see it go. This weekend, we will pack up the house, turn off the water, close the shutters, and head for the airport. We’re heading to China first. Stay tuned.

Meanwhile, the first revision of the GDP numbers for the last quarter. We expected them to show substantial weakness. Instead, they show what looks like strength – with the US economy expanding at a 4.2% rate in the last quarter.

The economy may be growing. Stocks may be near a record high. But the typical American owns no stocks and his own prospects are depressing. Here is a report from The New York Times:

For five years, the United States economy has been expanding at a steady clip, the stock market soaring, the headlines filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.

What might account for the paradox? New data from a research firm offers a simple, frustrating answer: Middle-class American families’ income is lower now, when adjusted for inflation, than when the recovery began half a decade ago.

This is hardly news to us. We’ve been following the real economy – as best we could – for the last 15 years. Dear readers already knew that household income, hourly wages, and household wealth were all down – for most people.

The averages are distorted by the few at the very top, but the typical American suffered a big drop in 2008-2009, and has never recovered. In fact, he is worse off today than he was at the bottom of the hole in 2009.

Bill Bonner on markets, economics & the madness of crowds

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In June of that year, according to Sentier Research, the median family earned $55,589. Today, that figure is $53,891, inflation adjusted. That ‘median’ family is right at the middle of all US households. So, half of the people you see on the streets or in the shopping malls have suffered even bigger income losses.

But it wasn’t just the damage done by the crisis of ’08-’09 that has lowered incomes. The problem is bigger, deeper – it is the core defect in the debt-fueled growth model itself. A little bit of debt may be a good thing. Add more and it depresses growth, keep adding and the whole shebang eventually blows up.

Sentier’s numbers show the deterioration in household income began at least 14 years ago. Today, the typical middle-income family earns less than it did when the 21st century began – despite the biggest wash of cheap credit the world has ever seen. In other words, policy makers’ efforts to increase real demand have failed miserably.

Go figure.

But our guess is that the feds will not spend much time figuring out why their stimulus model doesn’t work. It’s the only tune they know. As it fails, they will merely keep singing, louder.

How? Bypassing the banks, they will put their printed money directly in the hands of the people whose votes they need to buy. This kind of flagrant money-printing is becoming intellectually respectable, as a kind of final solution to the problem of insufficient demand.

Martin Wolf, influential editor of the Financial Times, has already suggested it publically. And now, here comes an article in Foreign Affairs magazine: “Print less and transfer more: why central banks should give money directly to the people.”

Recognizing that quantitative easing (QE) and ZIRP (zero interest-rate policy) are not making it to the top of the charts, the establishment is getting behind more direct inflationary measures. The article explains:

“It’s well past time, then, for U.S. policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops…. Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending…. Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly….”

Are you still holding government bonds, dear reader? Make sure you get rid of them before the music stops.

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    If I had a helicopter, I’d fly it all over the land and saturate the country with cash like it was going out of fashion! Though I’m not sure everyone would spend it, Milton!

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