Feds’ Plan is to Reflate the Economy

Jobless claims eased for the second week in a row. Hallelujah. The economy is still unloading jobs, but at least its not dumping them like it was earlier in the year. Which leads a number of economists to the old refrain: 'the worst is behind us.'

Meanwhile, from Japan comes encouraging news. The Nippon economy is increasing its industrial output at the fastest pace in 56 years. And oil is signaling a global rebound, isn't it?

"I don't think so," says MoneyWeek's editor in Paris. "There is no increase in oil consumption. Instead, consumption is still going down. What we're seeing is speculation. The central banks are adding to the funds available for speculation. So far, that money isn't reaching the consumer economy...it's mostly in the natural resources market betting on inflation."

Everywhere you look, dear reader, is a war zone. Nothing is safe. The feds' war against deflation does collateral damage to almost everyone and everything.

But you have to give the feds credit. Raw materials...gold...oil...emerging markets - all have seen big increases. Major stock markets too are showing big gains.

But the feds' plan is not to reflate the asset bubble, but to reflate the economy. For that, they need rising consumer prices. Consumers need to borrow...and spend. They'll do so, say economists, when prices rise and their dollars lose value. So far, milk and potatoes aren't cooperating. The price of milk fell so low that farmers slaughtered their herds. As for potatoes...we don't know.

In Europe, inflation has disappeared. This is the first time the euro zone has ever had flat and falling prices. In America, too, consumer price inflation is ebbing away.

In other words, the feds may be winning a battle but losing the war!

As usual, there's a lot of smoke and fog on this battlefield. Consumer confidence is rising...but so is unemployment. The New York Times says US joblessness may soon pass Europe's habitually-high rates. The Chinese are still buying America's debt - but only the short-term stuff. America's biggest industrial company goes broke...the government takes a key role in key industries...but investors buy more stocks!

If you look through your binoculars you will have a hard time figuring out who's really winning. In the confusion of the battlefield, even a hardened veteran often fails to tell which way the fight is going. In fact, you might see rising stock prices and get the wrong idea...like watching the Yankees get chased back to Washington after the first battle of Bull Run; you might have thought that that was all there was to it. The war was over and the South had won.

Not quite.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

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