Why Printing Money Won’t Correct the Correction


Well, dear reader, you know the story as well as we do.

“US Stocks Rise as Fed Announces Additional Treasury Purchases,” says Bloomberg.

US stocks advanced, with banks helping benchmark indexes erase losses, after the Federal Reserve announced an additional $600 billion of Treasury purchases through June in a bid to boost growth in the world’s largest economy.

The S&P 500 climbed 0.4 percent to 1,198.03 as of 3:16 p.m. in New York. The measure had fallen as much as 0.8 percent. The Dow Jones Industrial Average added 26.64 points, or 0.2 percent, to 11,215.36.

“Nothing in here tells me that we should be selling stocks,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion. “The latest economic figures have been good. We have the Fed and the elections behind us. So there’s less uncertainty.”

The S&P 500 surged 17 percent since July 2 through yesterday as odds increased that Republicans would take control of the House. The GOP, while falling short of winning the Senate, narrowed the chamber’s Democratic majority yesterday in an election shaped by voter anxiety over jobs and the economy.

Republicans gained at least 60 House seats across the country, capitalizing on concern that government spending has increased over the last two years and delivering a rebuke to the domestic agenda of President Barack Obama.

The S&P 500 may rally as much as 16 percent in the next six months because the election will stymie legislative initiatives in Congress, billionaire investor Kenneth Fisher said.

What? Does he just make this stuff up? Maybe stocks will go up. Maybe they’ll go down.

We don’t know. And we don’t care. Stocks aren’t cheap. And the country is still at the beginning of a major adjustment…a Great Correction that will probably depress business profits for many years.

Besides, the stock market never has completed its historic rendezvous with the garbage pile. Yes, every investment asset class goes from the trash heap to the penthouse – and then back. By our calculations, US stocks are on the downside of that slope. We’ll wait ’til they reach the dump – that is, when they’re at giveaway cheap prices – before we get excited about them again. We want to pick them out of the trash at pennies on the dollar.

Of course, we could wait a long time. From trough to peak typically takes 16 to 20 years. If you take the peak as of January 2000…when the NASDAQ hit its high…we have another 6 or so years to wait. But if the peak was the peak in the Dow of 2008…heck, we could wait until 2028 until we finally hit bottom.

And don’t forget. Japan waited 20 years between its glory days of 1989 and its low of 2009. We could do the same. But so what? We can wait….

But let’s talk about happier things. This year the voters – God bless ’em – threw out more bums than usual. The Republicans gained 60 house seats.

That means Congress is gridlocked. Obama doesn’t seem to understand what is happening. And Ben Bernanke is cranking up the presses.

The Fed announced a $600 billion purchase program, from here until June. Even in dollars, that’s a lot of money to throw into a market. The stated purpose is to lower interest rates even further…trying to coax business into hiring and consumers into spending.

Will it work? Will it create real prosperity…growth…and wealth? Ha. Ha. Nope. No chance.

How can we be so sure? Well, theory and practice. In theory, it makes no sense. Real jobs require real investment by real investors, entrepreneurs and businesspeople. It takes time. Skill. Luck. Giving the banks more money (which is what happens with QE) merely destabilizes serious producers. They don’t know what to expect. Cheap money forever? Will inflation increase? What should interest rates be? They don’t know. So, they wait…and watch…and the slump gets worse. Besides, the economy is correcting for a reason. Any interference is bound to be a mistake.

The lessons from experience are even more damning. There is no instance in all of history when printing press money actually turned around a correction. And if you really could make people better off by printing money, Zimbabweans would be the world’s richest and most prosperous citizens. Followed by the Argentines; they’ve got 25% inflation right now.

Nope; it isn’t going to work. And even if it seems to be working…it will actually be making people worse off.

And more thoughts…

Here’s Bloomberg on the subject of QE:

The Federal Reserve may be underestimating the inflation outlook for the second time in less than a decade as it prepares to pump more money into the US economy.

The Fed today will probably restart purchases of bonds to spur the economy even as growth is likely to accelerate at a 2.6 percent annual pace in the second quarter of next year from 2 percent last quarter, according to Bloomberg News surveys of economists.

“By expanding Fed assets, Chairman Ben S. Bernanke may go down the same policy path taken in 2003-04, when he and other central bankers kept rates near a record low as inflation rose faster than initially measured. Bernanke may risk increasing expectations for higher inflation by too much, causing a shake-up in currency and bond markets,” said James D. Hamilton, a University of California, San Diego economist.

“That perception alone would bring about a series of immediate challenges, such as a rapid flight from the dollar, commodity speculation and possible under-subscription to Treasury auctions,” said Hamilton, a former visiting scholar at the Fed board and the New York and Atlanta district banks. “So the Fed has a careful tightrope act here.”

Since December 2008, the Fed has kept interest rates near zero and used asset purchases to try to stimulate growth following the worst recession since the 1930s. New asset purchases would follow Fed acquisitions of $1.7 trillion in Treasuries and mortgage debt that ended in March.

*** And here’s an item from Reuters’ “Business Banking News:”

“Wealth managers want to wean investors off gold.”

What? Wealth managers are a threat to your wealth. No doubt about it. The US government runs $3 trillion of deficits since the end of ’08. The Fed prepares to print $600 billion more, on top of the $1.7 billion it printed a year ago. In this situation gold is about the only thing you can depend on. It might go up. It might go down. But it won’t go away.

And it will be here long after the US bond market collapses and the US dollar disappears.


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.


  1. The Americans should have thrown out more Republicans, god bless em, with the Democrats totally in control so that they could pass all their legislature they wanted. Then you would see all the things the daily reckoning constantly endorses. Reducing deficits, more money spent on productivity rather than just war and cooperation between the BRIIC nations in partnerships which could allow some job growth and production capacity for the US.

    Obamacare reduced the cost of medicare, something I see rarely recognized. Why would you be happy about Republicans gaining so many seats? The only thing this accomplishes is preventing progressive reform and there is absolutely no way that the candidates or the GOP have shown any measure of being able to contribute to what has been accomplished. It should be clear that there are two main things which will happen, a) if there is any improvement in the economy the GOP will take credit for it (having attempted to block every single reform the democrats put forward) b) if there is any
    detrimental effects, the GOP will clear themselves of being responsible for any of it and blame everything on Obama policy.

    Strange Bill.

  2. China could be in the market to do some expansion this century??? – Like the US did in the 1800s – So Obamaland might sound vaguely useful as their 35’th province somewhere down the track? Providing the US doesn’t stuff its economy TOO irredeemably in the interim? :D

  3. Obamacare is a deliberate attempt to put private healthcare out of business and/or make it more unaffordable to more people so there is more demand for health insurance provided by the government.

    If Obamacare had a shred of honesty, it would have at least allowed people to purchase insurance from other states.

    If the goal of the Democrats were not an eventual single payer system, they would allow healthcare providers to charge users of Medicare and Medicaid more than what those programs pay for a given service like Australia’s government does.

    Daniel Newhouse
    November 8, 2010
  4. Daniel – do you mean private insurance if you earn above a certain amount?

    As for having a shred of honesty, that sounds extremely conspiratorial. Are you totally sure that the reason insurance is not allowed to be purchased from other states is because of the plan by Obama to make it a single payer system?

    Or is there another answer which is both plausible and sensible that you can think of or research to find out about such a possible case?

    It’s mainly to do with the constitution disallowing the federal government form interfering with state provisions such as in the case of health insurance policies. The GOP may have convinced you they wanted to change this, but that is something they could not have possibly made work because it would be against each states interest to allow competition against another state who they know will take their jobs away when their insurance company is not able to compete.

    If there is no business model that can keep healthcare costs low enough to provide to people then they are not competitive and should not function. One way or another the system has to collapse either by denying claims for whatever reason when claims are made because it can’t be financed, or by the business closing down.

    So to be clear, Obamacare is not an attempt to create a single payer system, but to allow a structure to exist which can drive a wedge through the way the system currently operates. After many years, either Republicans or Democrats will be able to push through the kind of reform which will provide a system more like Australias. This can only occur after there is a division between the states and their inherent desire for self preserving (not country serving) agendas and the money which elects them which comes from sources such as insurance companies. They will not operate at full capacity ripping off customers and sky rocketing profits with an alternate system which can both remove the profits from these companies through competitive and effective management as well as demonstrating a provision of care as contracted.

    In any event this was the ideal, and this is not what the Democrats got because Republicans blocked it. The outcome was at least something but nothing near what was originally requested.

    And lastly, the only way out of this is for America to use its military muscle to steal more of the planets wealth because it can’t create anything for itself. Clear leadership instead of the turmoil the US is suffering would give some clear sailing as to how America will be navigating. It is gridlocked and mostly because of GOP just voting no on every single last thing and the Democrats tried to do the right thing and compromise. Their economy is not going to recover anytime soon. The years ahead will show gold pushing up and up.


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