What Keeps The US Economy Alive: The Feds Fake Money

The US economy approaches the end of 2019 with a stable heartbeat but increasing signs of dementia.

Unemployment (mostly in low-paying ‘service’ industries) is low. GDP growth is still positive, if slowing. The Dow is still near the tippy top of its range. And the Federal Reserve is once again pumping fake cash into the financial markets.

Perhaps it’s because marijuana has been legalised in so many states…

…but most people think things are looking pretty good. According to Mr Trump’s tweet last week: ‘Everyone’s getting rich…’

And I’m working my ass off,’ he added, as if to suggest that there was a connection between the two things.

HOODWINKED! Why Australia’s ‘miracle’ economy is a farce

By hook or by crook

Occasionally presidents help SOME people get rich. By hook or by crook, most often the latter, some people are able to parlay their connections to the White House into some serious money.

After all, that’s what the Deep State is all about.

Some get contracts for weapons systems. Some earn big bucks as lobbyists. Some rake in the dough by offering ‘access’. And, of course, the president himself often cashes in, after his time in Washington, by giving speeches, selling books, and other showboating.

This week, for example, Trump sweated up another trade war — this time with Brazil and Argentina. ‘What did we do?’ the stunned Latinos asked.

We don’t know either. But a tax on imports from South America is very unlikely to make everybody rich. Even US metal manufacturing workers are unlikely to see much gain.

The Wall Street Journal reports this morning that there are now 1,500 fewer jobs in the sector than there were when the tariffs were first imposed. And average Americans will simply pay more for things made of steel and aluminium.

Still, before the feds knock over the milk bucket, they make sure to ladle out some cream for their crony friends. From Friday morning to Monday afternoon, stock in US Steel (X) gained a dollar.

The president is, after all, Politician in Chief. And politics is all about taking away from some in order to reward others. Making EVERYONE rich is not part of the program. Never has been. Never will be.

Weakening economy

Meanwhile, our survey of the numbers shows a generally weakening economy — with slower growth in almost every important category, from final sales to manufacturing jobs to capital investment.

It was the slowness in manufacturing that was blamed for yesterday’s small stock market decline. The CNBC headline:

Dow drops 200 points after worse-than-expected manufacturing data’.

Bloomberg adds detail:

America’s industrial heartbeat remained faint in November as a measure of manufacturing contracted for a fourth straight month against a backdrop of weaker orders and subdued production. Stocks and the dollar fell, while Treasuries rallied.

The Institute for Supply Management data on Monday showed the factory purchasing managers’ index unexpectedly declined to 48.1, near the expansion’s low point, from 48.3. The median forecast in a Bloomberg survey of economists called for an improvement to 49.2. Readings below 50 indicate activity is shrinking.

But the trade warriors thought they saw some good news. The US trade deficit for October shrank by $5 billion, down from $70 billion in September.

Oops…not such good news after all. It narrowed because imports fell, not because exports increased. In other words, Americans bought less from overseas than they did the month before. Why? Probably because they had less money.

But of course, there is more to the story. And if we step back far enough, we’ll be able to see it more clearly…

‘Not QE’

For the benefit of new readers, we outline the important financial events of the last 50 years:

In 1971, the US left the gold standard and began issuing ‘funny money’. Consumer price inflation rose quickly. And measured in pre-1971, gold-linked dollars, the stock market collapsed. The Dow lost 98.5% of its value over the next nine years.

In 1980, Paul Volcker made a heroic stand against inflation. He won the battle and set off the current boom, with lower and lower interest rates over the following 39 years. Stocks rose in both real- and funny-money terms.

Following the crash of ‘87, the Fed began manipulating stock prices with the famous ‘Greenspan put’. Until then, the Fed saw its role as ‘taking the punch bowl away’ when the party got out of control. Thenceforth, it simply added more alcohol.

In 1999, stocks reached an all-time high. It took more than 40 ounces of real money — gold — to buy the Dow. Compared to 1971, stocks were twice as high.

With the new century came a correction — for the US and its stock market. The Fed fought the stock decline with a 500-plus basis point (5%) cut in interest rates. Stocks rebounded in nominal dollars, but continued to fall in real, gold-backed 1971 dollars.

In 2001, George W Bush announced one of the most blockheaded moves in US foreign policy history. His War on Terror has so far cost the nation $6.5 trillion…with plenty more to come. This expense, along with the need to support stock prices and the US’ retiring baby boomers, made the country dependent on funny money.

In 2008, another major correction cut stock prices in half. Again, the Fed countered with a 500-plus basis point cut, along with a $3.6 trillion dollar asset buying program (quantitative easing, or QE). Again stocks rebounded in funny money, but continued to fall in real money terms until 2011.

In 2015, the Fed decided to begin ‘normalising’ interest rates and reducing its holdings of bonds (quantitative tightening, or QT). It never got its key rate above 250 basis points.

In 2018, a modest 15% correction in nominal stock prices caused the Fed to panic and abandon its ‘normalising’ policy. The following year it lowered rates three times.

On 3 October 2019, a rumour circulated that the Fed would restart QE. Five days later, Jerome Powell confirmed that it would enter the ‘repo’ market, ‘but don’t call it QE,’ he said. Stocks went up.

By November, this ‘not QE’ was adding money to the markets at the rate of $1.5 trillion per year — more even than during the crisis period of ’08–’09.

The president can work ‘his ass off’ all he wants; it’s the Fed’s fake money IV that keeps this vegetable alive.


Bill Bonner,
For The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

The Rum Rebellion