Cash and Credit Created from Thin Air is Not Real Wealth

Something mysterious is happening.  The U.S. economy is deflating at the very moment the Federal Reserve is huffing and puffing more than ever to pump it up.  How could this be possible?

Like jumbo shrimp or an ashtray with a no smoking symbol, it’s a paradox.

If the Fed is pumping up the economy, how can it be deflating?  How can the economy be deflating, if the Fed is pumping it up?

Yet that is exactly what’s happening…

“In its first estimate for the first three months of the year, the Commerce Department on Thursday said gross domestic product rose at a 1.8 percent annual rate between January and March,” reported MarketWatch.  But when you remove inventories from first quarter GDP, and look at what was actually sold to retail consumers, the economic picture is much worse.  Final sales rose just 0.8 percent.

All the while, the Federal Reserve is pumping $2.5 billion of freshly printed paper money into the economy each and every day.  With money infusions like this you’d think the economy could eke out a return better than 0.8 percent.  However, all the Fed has to show for their mischief is a slew of market distortions…

Follow the Money

Obviously, Fed money creation is not improving the economy.  Last week the Labor Department reported that new applications for U.S. unemployment benefits increased 25,000 to a seasonally adjusted 429,000 in the week that ended on April 23rd.

So if the money’s not going into the real economy where’s it going?

To answer the question all you have to do is follow the money.  It doesn’t take much snooping around to find the money’s going just about everywhere except for the real economy and housing.  Specifically, it’s going into financial markets…

Year to date stocks, as measured by the S&P500, are up 8.43 percent.  Oil is up 22 percent.  Gas prices at the pump are up 23 percent.  Gold is up 13 percent.  Silver is up 60 percent.  Over the last 12 months the food price index has jumped 32 percent.  Just about everything is up…except for the dollar.

The dollar is not up.  In fact, the dollar is the opposite of up; it’s down.  Year to date the dollar, as measured by the dollar index, is down 7.59 percent.  What this means is the dollar’s loss in value has practically erased any stock market gains.  Tack on broker fees and most investors have a net loss.

But what about the guy who doesn’t own stocks?  His income is stagnant while prices are rising.  In other words, inflation is taxing his income.

Cash and Credit Created from Thin Air is Not Real Wealth

What’s more the market distortions being created by the monetary malfeasance, while disruptive on the upside, will be extremely destructive on the downside.  No doubt, what goes up must come down.

When the next market crash hits things could really get ugly.  We could be in for a repeat of late 2008 when Lehman Brothers collapsed, the Treasury bailed out preferred big banks via AIG, and the Federal Reserve injected massive amounts of liquidity into the financial system.  It will then become clear that the bad debts from the housing bubble never went away…they were just temporarily submerged by a rising tide of liquidity.

Moreover, as you can see, all the Fed meddling in the economy has proved to be remarkably unhelpful.  While their intrusions don’t improve growth or lower unemployment they succeed at driving up prices and turning financial markets into a giant speculative casino.

When it comes down to it the Federal Reserve would have done a much better job and much less harm had they taken their $2.5 billion per day of funny money and flushed it down the toilet.  Perhaps unemployment would still be up and the economy would still stink but at least gas wouldn’t cost $4 a gallon.

Even a third grader can understand that cash and credit created from thin air doesn’t amount to real wealth.  But run a kid with above average intelligence through a couple Ivy League university economics courses and they’ll believe anything.  The hypothetical models and theoretical mumbo jumbo reduce their brains to mush.

Given the opportunity they’ll bestow ruin to prove they are right.  When they are wrong they’ll bestow some more.


MN Gordon
for Economic Prism

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