QE3 Can Never End

Back in June, as the official government unemployment rate continued to fall, Federal Reserve Chairman Ben Bernanke indicated to the public that the Fed might begin to scale back its easy money policies sometime before the end of this year.  As the Fed met this past week, many economists and analysts expected it to announce that the central bank would indeed begin tapering its current $85-billion-per-month bond buying scheme known as Quantitative Easing 3.

But, these are also the same pundits who have been claiming for five years that the U.S. economy is in a state of recovery.  They are either disingenuous or totally clueless.

This commentator had no doubt the Bernanke Fed would not begin tapering QE3 now.  In fact, QE3 may never end.

In the first place, for five years now the Fed has injected over $2 trillion into the economy through QE 1, 2, and 3 and the real unemployment rate is still north of 14 percent. More Americans are on food stamps than ever before.  Middle class incomes are down and poverty is up.  At this point, Bernanke’s largess is a life support system for the economy.  It will not cure the patient; just simply prolong the agony until the day of reckoning.

And the day of reckoning will come when long-term interest rates climb to the level where the current QE induced housing and stock market bubbles pop.  The carnage from that, however, will be minor compared to the destruction left behind from the mother of all bubbles – Treasury Bills.  The point is, in June when Bernanke simply mentioned the Fed might begin tapering the stock market tanked 550 points and T-bill and mortgage interest rates instantly rose.  Imagine the impact if the Fed really pulled the plug on the economy’s life support.  Additionally, because T-bill and mortgage interest rates have been rising that could mean Bernanke has lost control of long-term rates.  The only tool he has for combating rising rates is more stimulus.  Thus, instead of taper talk, analysts should be asking when the Fed will increase the amount of bond purchases per month.

Lastly and perhaps the biggest reason why the Fed may never be able to cut back on its monetary stimulus is because to do so would accelerate the insolvency of Uncle Sam.  Realize that even though the current national debt is almost 3 times what it was in 1996, interest payments on the debt after adjusting for inflation are lower today than they were then.  The difference is the rate of interest the federal government is charged.  Bernanke has no choice but to keep printing.  If he tapers, rates will go up, interest payments will become a bigger share of federal expenditures and he will have to print even more to keep things going.  The hyperinflation that will result will finish off what’s left of the U.S. economy.

Many will say the above is nothing more than doom and gloom.  But, the above scenario is real.  Ben Bernanke steered Fed policy down a dangerous path in 2008.  Instead of allowing the market to liquidate the mal-investments from the preceding boom, Bernanke chose the politically correct way by attempting to re-inflate the bubble.  Instead of letting those that were reckless and brought on the crisis lose their shirts; Bernanke launched a massive program of bailouts and bond purchases.  He has printed himself (and us) into a corner and thrown away the key.  To keep things from crashing he has no choice but to continue printing.  Even then, the end will ultimately come and the devastation will be so much worse than 2008’s crisis.

Here We Go Again

The week before last, Federal Reserve Chairman Ben Bernanke emerged from a Federal Open Market Committee (FOMC) meeting and proclaimed that the FOMC came to the conclusion that it may be “appropriate to moderate the pace of (bond) purchases later this year” if the economy continues to improve.  Mind you, he didn’t say the Fed would syphon liquidity out of the economy, simply that it might cut back on its buying of bonds if conditions warranted it.

What happened next was remarkable.  The price of gold dropped $100 an ounce, silver was down 8 percent, the yield on 5 year U.S. Treasury bonds surged by its largest percentage ever, and over a two day period the Dow lost more than 500 points.

Arguably, Bernanke and the FOMC are America’s version of the old Soviet Politburo – central economic planners that thwart the will of the market.  By having ultimate and unfettered control of monetary policy this small economic oligarchy has practically complete control of our economy. The question is, why do we tolerate this?

It’s not just what the Fed chairman says that is a problem; it’s what he does that is even more intolerable.

Albert Einstein use to say, insanity is “doing the same thing over and over again and expecting different results”.  Under this definition, Bernanke is insane.

He has made no bones about the fact that his policies since 2008 were meant to make Americans feel more prosperous so they would start spending again and stimulate the economy back to good health.  In essence, his goal was to re-inflate the housing and stock market bubbles.  According to recent statistics he has done just that.

Nationally, the median price for existing single-family homes was $178,900 in the fourth quarter of 2012, up 10 percent over the same period in 2011.  This marked the greatest year-over-year price increase since the fourth quarter of 2005.

Southern California, Silicon Valley, Washington D.C., and New York City are all experiencing huge real estate booms with prices for pre-construction condos in Manhattan increasing on a bimonthly basis.

There is even a farmland bubble taking place in the Midwest and Mountain states with non-irrigated cropland prices increasing on average by about 18 percent.

In terms of the stock market, it’s no secret that the Dow has surpassed its previous high.  Given Bernanke’s remarks and the subsequent crash of the Dow last week, there is clearly causation between Fed pumping and stock market performance.

But, in all of this “good” news there are reasons to believe that Bernanke’s policies are leading us to another crisis.  Unemployment and underemployment are still high and incomes are down, so where is the money coming from to cause real estate prices to rise dramatically?    It is from speculators and Wall Street firms eager to invest the cheap money they’ve gotten from the Fed.  The problem is that all that cheap money will cause over-investment in the housing market – the production of more homes than are needed.  Once that happens and interest rates rise the bust will come leaving mom and pop homeowners once again holding mortgages against falling property values.

And there is a big reason to be concerned about the booming stock market.  Buying stock on margin reached an all-time high in April at $384.3 billion.  Historically, whenever margin debt has exceeded 2.25 percent of GDP the market has crashed.  This happened in 1929, 2000, and 2007.  Does this mean the market will crash soon?  No one knows for sure, but one thing is certain, Bernanke’s easy money has clearly re-inflated the stock market bubble, setting up mom and pop investors for another dramatic crash.

Thus, Bernanke has been successful in attaining his goal of re-inflating both the housing and stock market bubbles.  However, his policies have not produced an economic recovery as he believed.  In fact, they have brought us to the brink of another crisis.  It’s no wonder since he employed the same approach that produced economic crisis in the past.

The Dow is an Indicator of Price Inflation

Proponents of the Austrian School of Economics have been predicting that Obama’s lavish spending and Fed Chairman Ben Bernanke’s money printing through his various quantitative easing schemes would cause price inflation in our economy.  For their part, Keynesians have been highly critical of Austrians for this prediction claiming that current government fiscal and monetary policy will not lead to price inflation.  They claim we have had 4 years of stimulus spending (however not enough for their liking) and quantitative easing, yet if you look at the government numbers on price inflation prices are not rising.

Well, I suppose if you trust in government like Keynesians do, you will follow its rigged statistics without asking questions.  Over time the Bureau of Labor Statistics (BLS) has changed how its price inflation number is calculated.  For a full review of how it has changed consult statistician John Williams’ site Shadow Government Statistics.  Consistently, the BLS’s current calculating method has yielded a price inflation number averaging between two and three percent.  However, if price inflation were still calculated the way it was before 1980, the price inflation average would be closer to ten percent.  If it was calculated the way it was between 1980 and 1990 the number would be closer to six percent.

Comparing price inflation numbers of the 1970s with today is like comparing apples and oranges.  Washington has changed the parameters of the measure making a comparison useless unless, like John Williams, you calculate the number using the old formulas.

The same is true about the current euphoria over the Dow’s breaking of its all-time high.  In nominal dollars the Dow is at an all-time high.  But, what good is it if the value of the Dow has lost its purchasing power?

Let’s look at USDA retail price data for beef for example.  Currently, the value of the Dow will buy 3,332 pounds of beef at the retail level.  But at 14,500 points that is about 20 percent less beef than the Dow could buy in January 2000 when its level was at 10,600 points.

But, what’s that, you are a vegetarian so the increased price of beef doesn’t matter to you?

Okay, well, the Dow’s value could currently purchase 15.35 tons of bananas.  That sum would keep any troop of monkeys occupied for a while.  But, it is the same amount of bananas the Dow could have purchased in February 2008 when it was only at 12,266 points and 60 percent less in 1999 when the Dow was around 10,000 points.

And who could argue against the fact that the price of gasoline affects the prices of all other goods and an increase thereof is the most harmful to the working class.  Once again, price inflation can be seen by comparing the Dow’s current high with its previous value.  At today’s current high value, the Dow could purchase 3,812 gallons of unleaded gasoline in the U.S.  This is about the same amount it could have bought in January 2012 when the Dow was only worth 12,633 points.  The short window of time, 15 months, is indicative of how price inflation does exist in a big way in our economy.

In the final analysis, Austrians are right and Keynesians are wrong.  There is significant price inflation in our economy that has been caused by Obama’s prolific spending and Bernanke’s reckless money printing.  In fact, the numbers are indicative that price inflation has been with us for a lot longer time.  When will Keynesians realize this? Perhaps they will when the BLS publishes a true price inflation statistic.

Article first published as The Dow Is an Indicator of Price Inflation on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina