American Elephants

More “Quantitative Easing” From Mr. Bernanke, Which Will Accomplish…? by The Elephant's Child

More jobs were created per month last year than this year. Since January, job growth has averaged 139,000 per month. In 2011 the average was 153,000. Not good. You have to subtract the somewhere around 130,000–150.000 people who dropped out of the labor force each month. Doesn’t leave you a lot of gain. At this year’s pace, it would take 11 years to get the unemployment rate back down to 5%.

That simply won’t do, so the Federal Reserve has announced a third round of printing out lots of money, better known as “quantitative easing” or QE3. This is an effort to boost Obama’s election chances. People who know Bernanke say he harbors no illusions that it will actually result in a stronger economy. Instead he is trying to stave off economic disaster —a severe recession — because the economic policy offered by the Obama White House is such a disaster.

The Fed does this by buying bonds from the big banks, which drives down interest rates. The lower interest rates are supposed to attract businesses to borrow more, but businesses don’t take on more risk when risk is punished with more regulation and higher costs.

— Mr. Bernanke said Americans shouldn’t complain about not getting any interest on their savings because they’ll benefit in the long term from a better economy spurred by low rates. Lord Keynes famously said “In the long term, we’re all dead.”

— Making government borrowing essentially free encourages Congress to spend, but when interest rates go back up we have to pay interest on all that debt.

— The third big risk is future inflation. Mr. Bernanke notes that it remain low, but the Fed’s core inflation rate ignores the run-up in food and energy prices. You will notice that the price of gas is back up over $4 and the media never mentions it.

The stock market likes the move. Ratings firm Egan-Jones cut its credit rating on the U.S. government to AA– from AA citing its opinion that quantitative easing will hurt the economy and the country’s credit rating. They also set a negative watch, citing a lack of progress in cutting the mounting federal debt. Moody’s, S&P and Fitch all have a negative outlook.

Recovery? No sign of one. The folks at Reason have a wonderful graphic to illustrate “The Recovery That Wasn’t”  You’ll have to do a bit of enlarging, but don’t miss the two graphs in the center. The Obama administration in their own words. As Richard Epstein said, Obama doesn’t have the necessary skill set. Like understanding Say’s Law, for example.

Jean-Baptiste Say (1767-1832) lent his name to the bedrock proposition of classical economics: Supply creates its own demand. That is, manufacturers pay workers to make widgets, and workers use their pay to buy widgets. Savers lend their money to investors who build widget factories, and the factories’ profits go to repay principal and interest. A higher price will call forth more widgets, higher wages will call forth more widgetmakers, and higher returns will call forth more investment. Unless the government gets in the way, for example by fixing prices, markets will clear and everyone will live happily ever after.

Or from the University of Chicago on efficient markets: The stock market incorporates all available information. The thousands or millions of collective decisions incorporated in a market-determined price cannot be duplicated or even understood by one mind. You can’t beat the market because it’s smarter than you are.  Intellectually, the only task is trying to determine what the market is telling you.

Or the basic notion of Expectations: Economics being a branch of human behavior, reality is often less important than perception. The behavior of consumers and investors will depend on the economic conditions of the moment only as the present shapes what conditions they expect to pertain in the future.

Obama does not believe in the free market. He said so. Nor does he believe in Capitalism, and the Democrats, st the DNC, were quite ready to outlaw profit.

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