Rage Against the Machine; The Federal Reserve Continues to Distort the Economy

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Rick Santelli, the CNBC host who inadvertently started the Tea Party movement, got excited again on national television. Like his rant in 2009, this one was fueled by justified outrage. The talking heads to whom he addressed his anger seem to be amused that Rick would dare question the prevailing wisdom. To them, the Federal Reserve’s (FED) money printing operations, also known as Quantitative Easing, has been an economic savior. Never mind that the worst economic recovery in history continues to bleed jobs even as the Stock Market reaches new highs. They also see no problem with the fact that the welfare roles are continuing to expand at a record pace. Given that these dunderheads are totally incapable to understand the disaster unfolding around them, who can blame Rick Santelli for blowing a fuse.

Despite the incredulity shown by the other host’s, the facts are beyond dispute. As the graph below illustrates, the U.S. is in new territory when it comes to stocks and jobs. At no time in history has the two been so disconnected.

Of course the clues that show all is not right in the world go beyond a rising stock market and dismal employment figures, the GDP has also been disconnected from the stock market. Prior to the advent of FED money printing the change in stock prices closely fallowed the rise and fall of the country’s economic fortunes, that is no longer the case. Stocks can now be up even though the economy is down or vise versa. Even when the two seem to be in step, it is the uncoordinated dance of an awkward teenager.

The most striking result of FED Easing is the effect the program has had on the money supply. Comparing the M1 money supply (liquid assets) to its velocity (how fast it circulates around the economy) reveals something that has never happened before in any advanced economy. While the Federal Reserve has increased the money supply to unprecedented levels, the speed at which it is being spent has continued to drop. Since inflation is a product of changes in velocity and in the size of the money supply, the fact they are heading in opposite directions explains why the U.S. does not have double digit inflation. The reason for this anomaly is the massive amount of uncertainty created by the President’s policies is suppressing economic activity. The U.S. economy itself is being held aloft by nothing more than Central Bank hot air.

Despite the signs and even the hard proof before them, those who set in Ivory towers espousing the benefits of magic cash and social change refuse to accept that, maybe, they could be wrong. The economic policies of a mad man can’t be balanced out by a central bank manipulating the money supply (at least not for long).

FED Chairman Bernanke started the printing mayhem by trying to avoid the mistakes of the Great Depression. Worried about deflation, a very real danger after the banking crisis, he pumped cash into the economy. The economy, for its part, recovered quickly but was just as quickly quenched by the passage of ObamaCare and the fear of coming regulations. Soon printing became a way to paper over the renewed economic downturn. QE 1 turned to QE 2 and led to the present QE infinity as Obama’s relentless attack on business continued. In so doing, the Federal Reserve has created a trap for themselves and the United States with no easy way out.

They have created an unstable economy based on cheap money and risk taking. The markets have incorporated the expanding cash into them and have become to a large degree reliant on cheap money. At the same time huge amounts of this printed cash remain dammed up behind a wall of uncertainty, awaiting the right stimulus to unleash an inflationary torrent on the American people. Each day the danger grows as Americans, oblivious to the danger, slumber in peaceful ignorance.

As with all things economic, things must and will balance, even if that balancing is delayed. The amount of cash setting on the sidelines is unfathomable. Once fully unleashed, either by euphoria or panic, a hellish onslaught of inflation will certainly follow. A purgatory the American people must walk through to pay for the sins the Federal Reserve has visited upon them. The FED will try to counteract any such occurrence by tightening credit, something that might be akin to trying to keep the Titanic afloat by bailing out the water with buckets. The longer the FED waits to pull back on Quantitative Easing the worse things will be.

While some might declare such things alarmist, it is no more so than the graphs above that come out of the Federal Reserve itself. The Federal Reserve has dug a hole and is still digging, a hole that threatens to swallow the U.S. economy whole. What is needed is growth, real continuous and fast paced growth. Inflation will come, that is all but inevitable now, but how long it last and how quickly the economy returns to normal will depend on the ability of a growing U.S. economy to absorb the excess dollars. Of course, such growth is impossible under the present administration.

This all does not even address the national debt, but until America gets its economic house in order the debt is unfixable. Correspondingly, until the U.S. has a new President the economy will remain in a state of chaos. In the mean time, the world can rely on the Federal Reserve to continue to prop-up and distort the economy with foolishly low interest rates and/or printed cash, at least until the forces of economic reality force it to stop.

“The Conservative Mind”

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