The Fed Continues to Bamboozle Consumers Into Thinking They Are Richer Than They Really Are

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“Hey, dude, where’s my fiscal stimulus?”

It’s in the mail, dumbo.

The U.S. feds have been hard at work pushing out $110 billion of ‘rebates,’ designed to help Americans do what they already do best – spend money that they never earned.

The resulting spending spree comes after 7 rates cuts sent the Fed’s lending rate down to only half the rate of consumer price inflation.

At the end of last week, the Fed also announced that it would allow lenders to launder their dirty car loans, student loans and credit card debt; they can henceforth use it as collateral for loans from the Fed. And this week, Ben Bernanke, guardian of the nation’s money, urged Congress to take action to avoid more foreclosures.

And then, there’s the promise of a “tax holiday” on gasoline for the summer.

All these measures are designed to do the same thing – make people feel richer than they really are. Thanks to the Fed’s emergency low interest rates, they can borrow more money and pay less for it. Thanks to the ‘rebate’ checks, they can spend more money too. If the feds intervene to block foreclosures, as they have already stepped in to bail out Wall Street, people who should have gone broke can still hold their heads up…and live in houses they can’t really afford.

And now, dear reader, we find that all these marvelous deceits are having an effect; they’re bamboozling almost everyone into thinking things are getting better.

There’s also a hidden flimflam…an even more important one. Since ’95, reports Martin Hutchinson, the U.S. money supply, as measured by ‘money of zero maturity,’ has gone up at about 8.8% per year. The average fellow, seeing that he has 8.8% more cash – and with no knowledge of the volume theory of money – might reasonably conclude that he is richer. But when money increases faster than the goods and services it’s destined to pay for, the result is rising prices. At 8.8%, U.S. money supply was increasing about 50% faster than the GDP. You’d expect prices to rise and the dollar to fall – which is exactly what has happened.

But recently, the feds have put their fabulous money machine into high gear. MZM has been going up at a 28% annual rate over the last three months.

Here at The Daily Reckoning, our theory is that the feds’ inflation will goose up prices of commodities, gold, U.S. money supply and oil – but not the real economy. So far, that seems to be what is happening. The CRB commodities index is up 24% since last September. Oil has gone up 25% this year. Natural gas has risen 49%. Gold, meanwhile, has only gone up 4.8% in 2008…but this is after a correction; remember, it was over $1,000 just a few weeks ago.

As for consumer prices…the latest numbers show consumer prices rising at an 11% rate in March. This number would have been a shocker – if it had ever seen the light of day. Instead, the boys down in the basement of the Labor Department went to work on it with hammers and baseball bats; when they were finished, the number had been ‘seasonally adjusted’ down to only 3.6%.

But consumer price inflation is definitely in the pipes. It will start coming out of the faucets and backing up in the drains soon. Yesterday, oil – the sine qua non of modern economies – rose to a new record high of $122 a barrel. People are killing each other over rice and wheat. Farmers are sleeping in their fields to prevent thieving neighbours from helping themselves. And crooks are peeling the lead roofing off of churches in England…pilfering copper gutter pipes in Baltimore…and stealing the manhole covers in Detroit. This huge run up in prices of primarily materials has to make its way into prices for finished products – sooner or later.

And how about the economy? The latest report showed the economy growing at a 0.6% annual rate. Since the population is growing at 1%, this represents a real decline in output per person. We’re getting poorer, in other words – just as forecast.

Still, all of this new cash and credit is creating its own happy disaster. People who didn’t completely ruin themselves in the bubble phase are getting another chance. People who should be saving for their retirements, for example, are being encouraged to continue borrowing and spending as if nothing had changed. People who should move to a house they can afford are being encouraged to hold on to digs that that are beyond their means. Companies that should be liquidated are being refinanced and restructured on the Fed’s EZ Credit. And to many people, all this looks almost too wonderful.

Yesterday, we mentioned Warren Buffett’s comments – the credit crunch is over, he said.

Today, the Wall Street Journal tells us that the “housing crisis is over,” too.

In a way, they’re probably both right. With lower rates coming in…and fiscal stimulus checks going out…the money is flowing again. The ‘crisis’ stage is probably over – at least for now. But your teeth don’t get better by putting off a visit to the dentist. And when the pain returns – probably in a few months – it will be worse than before.

That’s why we continue to advise our dear readers to protect your wealth and assets now…because the initial crisis may be coming to an end – but the aftershocks will be felt throughout our economy for months (or years) to come.

It’s always best to be prepared…learn how you can make the best of this topsy-turvy market environment here.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Gold is definitely the best place to be right now.

    Reply
  2. Bill,

    Agree with most of what you write.

    Here in US, today, announcements are flowing from our news media that many folk are spending money they do not have by using credit cards.

    Nothing wrong with that if you pay your monthly balances off, but people who can’t do that continue to spend using credit.

    Now compare that to what we just went through. Some called it a “subprime crunch.”

    Well, isn’t someone using a credit card, who can’t pay off that credit card “a subprime borrower?”

    Do credit card companies recognize that this debt mountain, based upon fundamentals you discuss above, is about to collapse?

    Financial pundits are talking about “asset backed debt insurance!” But isn’t that just a compex way of saying “savings?” What other way does one “insure debt” absent collateral?

    Or is anchor Cheney right: “deficits no longer matter?” If that is so, then “money no longer matters,” and many of you have been saying so by calling paper money “fiat.” I agree!

    All I can say is watch out, and like Curt says above, if you can… ‘buy metals’ — take physical delivery — and hang on to them.

    Platinum is rallying nicely now. Plausibly Au will follow and Ag is apparently in a real shortage…

    Best,

    Doug.

    Reply

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