Just Print More Money: The Easy Way to Manage and Economy

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You can’t say it didn’t work. At least one of Mr. Bernanke’s aims was realized.

He went into the bond market, and bought US debt, in order to lower long-term interest rates. That was a bust. Long rates went up, not down.

He also wanted to raise inflation rates. No success there either; consumer prices are flat. The CPI is still registering the lowest increases since the ’50s…rising at about 1% per year.

Finally, Mr. Bernanke was counting on the “wealth effect.” He would put more money in speculators’ hands. They would bid up asset prices. People would feel wealthier. Presto! They would act wealthier – spending and investing more money and thus spurring the economy towards a full recovery.

Well, part of it worked. Asset prices went up. The Dow went up another 55 points yesterday.

Here’s Bloomberg’s report:

Republican leaders in Congress say they have “deep concerns” about Ben S. Bernanke’s second round of quantitative easing. The US stock and credit markets don’t share those reservations.

The Standard & Poor’s 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy. Junk bonds rallied, with the extra yield that investors demand to own the securities instead of government debt shrinking to 5.45 percentage points yesterday from 6.81 points, according to Bank of America Merrill Lynch index data.

“It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.”

“As people get more confident about the economy, money is coming into the stock market,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia. “The most important way quantitative easing works is the provision of liquidity.”

What? Liquidity? There’s no lack of liquidity. It’s solvency that the market lacks. Adding more credit (liquidity) just makes it worse.

But no point in telling Mr. Siegel or Mr. Bernanke that. They’re convinced that if they can just stuff enough new money into the system, everything will be all right. Isn’t that amazing? Just print up money. Just add cash. Just put in more paper money.

See how easy it is to manage an economy? Just print up more money…

And more thoughts…

We flew from Miami to Liberia, Costa Rica. No problem.

We got into a van for the trip to Nicaragua…comfortably rolling along the Pan American highway. There were a few sugar cane fields. But most of the landscape was grazing land…or just forest.

After an hour or so, we came upon a line of tractor trailers on the side of the road. At first we thought they were taking a break. Or, maybe one had broken down.

“No, this is the border…” said our driver.

We passed one truck…then another…then 5 more…then 100… Groups of drivers lollygagged by the roadside. Some hung in hammocks from the undersides of their trucks.

“Some of these trucks have been waiting 2 days to pass the border,” our informer continued.

The Bismarck in us was appalled.

“Why can’t they organize this better?” we wanted to know. “It must be costing these economies millions of dollars to have so many trucks idled at the border…so many people doing nothing. And think of what it does to trade. You can’t ship anything because it must cost a fortune. If they made me dictator of either country I bet I could add a few points to GDP growth overnight. I’d just open the border.”

“Yes… But they’re worried about illegal immigrants. They cause so much trouble, you know.”

No, we didn’t know.

But a friend enlightened us.

“I just spent two weeks down in Costa Rica. It was amazing. They blame all their problems on the Nicaraguans. Crime. Drugs. I heard a woman tell me she lost her husband because ‘he started drinking with the Nicaraguans.’

“Then, when I got to the border…you know they’re threatening to have a real border war…the Costa Ricans treated the Nicaraguans worse than monkeys.

“I guess it’s the same everywhere. I was in Geneva. There, they blame the French for all the crime and social problems. In France, of course, they blame the Arabs. And the Arabs blame the Africans. And then, in South Africa, I was surprised to find that they blame all their problems on the Zimbabweans. Almost everywhere else in Africa, they blame the Nigerians. I don’t know who the Nigerians blame.”

We drove by about 1,000 trucks…miles of them…then, there were thousands of people on foot, carrying suitcases…5 gallon buckets…all manner of thing. They were headed north, as we were. Passenger cars passed the trucks…often driving on the shoulder of the road…or through the bushes. At one point, a whole group of cars and minivans, including ours, took a detour off the road…onto a dusty track. We drove through the scrub forest for a minute to two…through what appeared to be a junkyard but was probably a parking lot…and then came back on the highway. But by this time, it bore no resemblance to a highway. It was more like a jumbled up hubbub of refugees fleeing an on-coming army. Trucks, cars, bicycles…people walking, hobbling…all crowded together on a dust-caked road headed north.

But to where? There was no movement in the line of trucks. They seemed not to be mobile at all – but stuck permanently where they stood, their drivers setting up lean-tos and other temporary housing beside the road. As for the cars, they rolled slowly onward…dodging…weaving…gaining a yard…slipping off the road…barely avoiding an old woman with a pack on her back.

But where was the border? There was no sign of it.

At one point, we drove through a fumigator – like a feeble carwash that squirted a mist of disinfectant over the car. Then, it was back into the bedlam. There were no lanes. No rules. No order. No apparent destination nor any way to get there. You could turn left or right. You could go ahead. You could go sideways. There were no signs. No officials. No idea of where you were going or why.

Still the mob moved on… And now we were pulled along with it, like a log in a floating jam…we moved with the mass of vehicles.

Our driver stopped in front of a makeshift café. He went into a little concrete hut with our passports in hand. A few minutes later, a guard came and asked who we were. He did not seem particularly interested in our replies. He returned the passports. We got back into the flow…slowly making our way to the Nicaraguan border.

When finally we reached it, there were no border guards on duty. Three policia sat in plastic chairs chatting. Our van passed. There were no other cars or trucks. What had happened to them all? Why were the trucks stopped when the road was clear? Where were all those people who had been trying to cross the border?

“You know,” our Costa Rican driver explained, “people are going home for the holidays. You know, the Nicaraguans. They’re always causing trouble.”

Regards,

Bill Bonner.
for 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.
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Comments

  1. The question that needs to be asked is whether the US government is ever going to repay this money being borrowed from(created by) the Fed. There is no likelihood that the quantitative easing is going to end anytime soon because no one else wants to buy US bonds except the Fed. This is because the US government is effectively insolvent. If the government stops spending an extra $1.3T each year to support the economy the GDP would collapse at least another 15%. So what to do? Obviously the Fed is going to keep propping up this collapsing economy so expect QE3 and onwards.

    Reply
  2. The reason that our society has not yet collapsed completely is that everyone is responding to US currency devaluation by devaluing their own currency. So when hyperinflation finally arrives it will arrive everywhere at the same time.

    And given the rise in gas, food, and rent prices in the US, and the devaluation vs the Canadian and Australian dollars, the notion that CPI is low in the US is laughable.

    Daniel Newhouse
    December 24, 2010
    Reply
  3. I see a world where the corrupt have become so fat and so lazy that even the cash economy is collapsing .The corrupt have so much cash they dont need any more .
    All of the cash is in the hands of the few , the rest of the funding is electronically controlled and accounted for but is falling apart as the costs increase and whenever anyone wants to withdraw cash from the electronic system , it is unable to be funded or accounted for .
    Greed has won over and has control of all the finances , but where does it get more now ?? From the other Greedy people and Corporations ???
    Social collapse is imminent and what will be our legacy to the world ?
    Nuclear waste and devestation ???

    Reply

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