Surprise, surprise

Surprise, surprise, the feds pulled a rabbit out of the hat.

We had just been speaking with Simone Wapler, our colleague in Paris.

“I think it will come in lower than expected”, we told her. “And then it will be revised downward. Probably negative.”

We were wrong. Instead, the number that the feds delivered yesterday surprised to the upside. Four percent! Hey, that’s almost like a healthy GDP growth rate.

Well. What can we say? The feds were right. We were wrong. The recovery is real! The economy is booming! Central financial planning really works, after all!

And now Janet Yellen can join Ben Bernanke and Alan Greenspan on the cover of Time, as a great heroine, a Joan of Arc for the 21st century.

Wait a minute. In theory, you can’t create real growth by printing phoney money, and pretending to have ‘demand’ that doesn’t really exist. And, in theory, you can’t really create prosperity by jacking up the stock market and putting more debt, backed by collateral that isn’t really worth what they think it’s worth, onto people who can’t pay it back.

And there’s no theory that tells us we can build real wealth without saving money, and applying it to new factories, machines, skills, and so forth.

Since it can’t work in theory, we’re suspicious. Maybe it didn’t really work in practice either.

Is the economy really booming? Is it making people genuinely better off? Short answer: probably not.


Bill Bonner on markets, economics & the madness of crowds

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But to fully appreciate what has happened we need to go back seven years, to the fourth quarter of 2007. It was then that the credit machine was beginning to sputter. The mechanics at the Fed got out their wrenches and WD-40, and got to work. But they only really have one trick: they gave the thing more gas!

Lowering the fed funds target rate by 50 basis points, they claimed they needed to “promote moderate growth”.

Ever since, for seven long years, the feds have been stimulating the economy with ultra-low interest rates. In length, this is the same amount of time as it took Pharaoh to prepare for the lean years, by laying in stocks of grain. And it’s the same length of time as the lean years themselves.

Pharaoh’s countercyclical programme was a great success. The people of ancient Egypt beat the Old Testament famine. How is the Bernanke/Yellen team doing?

As we’ve been pointing out, there are 3.7 million fewer full time jobs now that there were before the stimulus began. Household incomes for 99% of the population are lower than there were in 2007.

And the real rate of growth over the last seven years has been just 0.9% per year. Even a slight underestimation of inflation and actual economic growth has been negative.

Adjusted for population growth, too, and the ‘growth’ disappears entirely.

Real hourly wages have not risen a penny. Business investment is still 20% below 2007. And 77 million people have overdue bills in collection.

This was purchased, we remind you, by the biggest gush of cheap liquidity since The Flood. All that cheap money has washed over the economy, seeped into every transaction, and warped and rotted every price signal.

But hey, GDP is growing at a 4% rate! (Subject to later revision, of course!)

Janet, you go girl!

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