Bernankenstein Economy

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After three years of very loose money care of Ben Bernanke and the Fed, are we on the road to a full recovery?

This is the question on our minds as the presidential contest between Mitt Romney and Barack Obama gets underway.

Granted, Bernanke is not Obama, but he may as well be. Deficit spending is deficit spending, and that is the big deal in the recovery plan, isn’t it?

Spend our way back to recovery?  That is the plan, is it not?

Thus, we are in recovery in much the way Dr. Frankenstein’s re-made monster from the grave was “in recovery”—a warped, artificially created man-beast with some attributes of humanity, but lacking the soul of a real human being.

We are experiencing is a Bernankenstein economy.

It’s alive!

The economy is alive, but it is not living as we normally think of it…

To be fair, monetary policies tend to have a delayed impact on the economy.  But after three years, it’s fair to say that QE1, 2, and Operation Twist have not led to full recovery.

But they have led to higher stock market prices, higher gold prices, and higher oil prices.

How have these price increases affected the macro economy?

Let’s take a look at stocks, first.

When the Dow crashed all the way down to 6,500 in March of 2009, much of the retail investor appetite went away.  A large portion of the buy and hold investors just couldn’t take the risk anymore.  Housing prices had fallen, and the economy was in recession.

Buying the market was a low priority.  To a large extent, that hasn’t changed.

American businesses reacted to the crisis by laying off workers by the bushel and moving more of their operations abroad.

That was profitable.  Labor costs fell and output fell, while inventories lasted longer.  The injection of capital from the Fed went right into the markets, reviving stock prices and keeping money flowing into US firms.

The QE money also fed business-to-business demand.  Thus, firms did business with one another and less retail business, and they did it with higher levels of offshore labor.  So the easy Fed money revived lagging businesses by improving their balance sheets, profits, and stock prices.

Hiring, though it has picked up, is less than you’d think because not all jobs cut three years ago are still available in the US.  They’ve gone away.  Some may come back as income levels in the US and the value of the dollar continues to fall, while labor/manufacturing costs and political risks in offshore markets rise.

Gold tarnished?

Now, to gold.

If you look at a chart of gold prices and quantitative easing, you would see that gold prices rise as the Fed’s QE money supply rises.  This is due to the debasing of the dollar from adding trillions into the world markets the past three years.  And, at the same time as the Fed’s QE policy, the Euro crisis arose.  This led to a drop in the value of the euro, so uncertainty rose as well.  This muted the effect of QE in terms of the value of the dollar—it strengthened relative to the euro.

By the fall of 2011, gold had risen to around $1,900 an ounce.  Since then it has fallen from its high to around $1,660 an ounce.  Why?

One big reason is that even though the dollar is debased, it is still relatively strong vis-à-vis the euro.  Also, the US economy has shown some level of “recovery,” as noted above.  Both of these factors cause gold to fall.  Of course, there are other factors for gold prices falling. They include lower demand from places like China and India.  And when interest rates go up, as they must sooner or later, gold may well drop further.  The current price drop is not directly related to the Fed’s actions, but indirectly so.

But the price of oil is directly related.

Oil prices staying higher

As I have said many times before, the Fed’s QE policies have devalued the US dollar.  Oil is bought with dollars on the world market.  A devalued dollar means that it takes more of them to buy oil.  How many more?  Oil prices are about 75% higher than they were before quantitative easing.  Most of that price rise is due to dollar devaluation.  That is one area where the Fed’s policies have not lagged in their effect.

Higher oil prices have an effect on other prices, like food, so they are inflationary.  But, the direct effect on the economy is less than you might think.  The psychological effect on consumers, who also happen to be the electorate, is much greater.  That’s because food and fuel prices hit people in their wallets every day.

Commodity prices in general have gone up, again, due largely to a devalued dollar.  Inflation (especially what can be called psychological inflation) therefore, is greater than what the Fed thinks it is.

The very loose money has had a powerful effect on commodity prices, corporate balance sheets, and the stock market.  The overall economy looks better than it did.  A Bernankenstein economy looks stronger on paper than it really is because it’s “a paper money recovery” for only part of the economy…

Consumers get the pitchforks

There is not recovery across the board.  It’s only in those areas where false liquidity is able to help.  Think about it; QE money did not go into consumers’ pockets.

There was no “cash from helicopters” as Bernanke famously suggested, given directly to consumers.

And since the consumer economy is about 70% of the total economy, 70% of the economy is largely unaffected by the Fed’s QE policies….except for some employment and the much greater effect of the inflation that it has caused.

This is especially true since those that received the money—banks and corporate America—have not “spread the wealth around” to the consumer.  Most lost jobs have yet to come back and many won’t.  They have gone abroad.  Those that have come back, pay less.

And banks are indeed lending their “free” money, just not to consumers.  They’re lending it back to the federal government by buying T-bills.

So, tight consumer credit has dulled the effect of the Fed’s “easy money” on consumption and the economy at large.

What does this mean for the recovery going forward?  More of the same, only with worse inflation down the road.

The Fed’s monetary policies have resulted in a warped economy with distortions in demand, prices, employment, and liquidity…a monstrous creation that will terrorize the peasants—er, consumers--and not end well.

Because the reality is this:  falling labor wages combined with 9%+ unemployment and higher food and fuel prices are not what real economic recoveries are made of.

And those are…The Gorrie Details.

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