By Bill Bonner
A Trifecta of Disappointment
2014 Preakness Stakes in Baltimore, Maryland. Source: Wikipedia
“De hosses run down an den dey come back / Doo dah, doo dah
Bet my money on a bob-tail nag / Oh de doo dah day”
– “Camptown Races,” Stephen Foster
A trifecta of disappointment last week …
First, the inflation number came down the track faster than expected. Then GDP lumbered across the finish line, lower than expected. And finally, at the end of last week, the poor consumer practically broke a leg in the home stretch.
As you know, dear reader, the idea behind the Fed’s ZIRP and QE policies is to stimulate demand. More demand – meaning more consumers spending more money they don’t have on more things they don’t need – is supposed to be a good thing.
Fed economists have bet trillions of dollars on it. Not their money, of course. Each year, since 2008, they’ve put money on the consumer nag. And each year, he’s failed to win, place or even show up. Then the following year, they’ve doubled down… with the chant “the consumer is back.”
The US economy is 70% consumer spending, reason the geniuses at the Fed. So anything they can do to boost consumer spending will also boost the economy. This sort of simpleminded logic is either breathtakingly naïve or mind-bogglingly stupid. Consumers need to have money to spend before they can spend it. If the economy is working properly, they earn it from honest bussing and schlepping.
But suppose the economy is in a funk? Then what are they supposed to do? No problem, say the economists. We’ll just create it. This ersatz money is supposed to stimulate the consumer to spend… whereupon, businesses will spring to life. They’ll offer him a job, boost his wages… and then he’ll have real money to spend!
But wait. If the Fed can just create money to increase demand, why bother doing it the hard way? Why do you need to earn money to create demand when you can just create it?
This point has never been clarified. Nor has the Fed ever noticed that consumer demand is the result of savings, investment, work, skill… and all the other things that go into producing a real product or service.
Consumer demand is not what causes those things to happen. In the abstract, demand is unlimited. But output is not. Nor has it ever been demonstrated that central financial planning works. And as of last week we have more evidence that it doesn’t …
Production and consumption indexes – via Saint Louis Federal Reserve Research.
A Sham Boom
What last week’s figures tell us is there is no real recovery. Just a sham boom created by EZ money. We’ve now got two months of figures for the second quarter. They tell us the same thing the first quarter’s numbers told us. Consumers aren’t spending like it was 2007. They’re spending like it was 2009… or 2010… or 2011.
In other words, they’re spending as though they were reasonable people who have realized how the system works. The Fed creates a world where its friends and cronies can borrow at below the rate of consumer price inflation. The 1% gets richer. The other 99% struggles to keep up with the bills.
As we have been warning, consumer prices are rising faster than the Fed admits. That leaves the typical household with less money to spend than the numbers suggest. We see the effect of it on consumer spending. The Fed pinched off savings, investment and employment. Now, it gets what you’d expect: low GDP!
Six years of “stimulating” the economy by giving it more of what it least needed has produced no real recovery… just more debt. It has also produced a corrupt money system in which almost every race is fixed. The 1% wins every time. The consumer is barely able to limp around the track.
Typical consumer on the race track
99 percenter duck
The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.