Why the Correction is Winning the Fight Against Fed Stimulus

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Here’s the latest report from Bloomberg:

Industrial production in the US increased more than forecast in November and consumer prices slowed, indicating the recovery is gaining momentum without generating inflation.

Output at factories, mines and utilities rose 0.4 percent, the biggest gain since July, after a revised 0.2 percent drop in October, a Federal Reserve report showed today in Washington. The consumer-price index climbed 0.1 percent in November after a 0.2 percent gain the prior month, the Labor Department said.

Assembly lines are speeding up as business investment and exports grow and consumer spending accelerates, helping to buoy an expansion that Fed policy makers said yesterday isn’t strong enough to reduce a jobless rate hovering near 10 percent. Price increases that are below central bankers’ goal will boost the case to maintain the Fed’s purchases of $600 billion in securities through June to spur growth.

Fed Chairman Ben S. Bernanke “is unlikely to withdraw accommodation until he sees a clear upward turning point in core inflation and a downward turn in unemployment.”

Hold on.

Are you telling us that after the Fed increases the core money supply by 300%…and says it is going to up it another 100%…consumer prices are still flat?

Yes? Hmmm…

And are you saying that slowing consumer price increases show that the “recovery is gaining momentum?”

Are you kidding?

Oh, dear reader… What claptrap! What nonsense! What balderdash!

The feds make the biggest stimulus effort in history. The Fed pumps $1.7 trillion into the banking system…with a promise of $600 billion more.

And consumer prices don’t even budge? What happened to the most fundamental laws of finance? Have they been suspended? Have we entered some perverse, parallel universe?

Or does this mean what we think it means…that the downward tug of the Great Correction is so strong it overwhelms all the feds’ efforts…the zero percent prime lending rate…the $700 billion stimulus bill…the $1.3 billion federal deficit…QE I, QE II…

That’s no success story. That’s a disaster.

Of course, all this money has to go somewhere. And there’s no mystery about where it has gone. Commodities are hitting new highs. Oil seems headed back to $100 a barrel. Gold was over $1,400 an ounce.

Even US stocks are up about 25% this year.

As predicted, the feds’ easy money has gone into speculative assets…not into the real economy. That’s why one out of 10 people in the workforce is officially unemployed…and why, unofficially, it’s probably more like one out of every 5.

And it’s why consumer prices are NOT rising. Imagine what would happen if this were a real recovery? Imagine that the Fed increased the core money supply by 4 times. Imagine what would happen to consumer prices!

Poor Ben Bernanke must be tired of imagining. He will keep printing money – or so Bloomberg concludes – until he doesn’t have to imagine anymore. He’ll print until he reads about inflation in the paper!

But when will that be? How much wood pulp will Ben Bernanke have to chuck into the printer until consumer prices rise and unemployment falls?

We’ll find out!

And more thoughts…

Is the US the “sick man” of the globe, asks a Reuters article?

It’s a provocative headline. And the answer is probably “yes,” in many respects.

“Report drunk drivers,” says one sign. “Report Suspicious Activity,” says another. “Report Unclaimed Bags,” says a third.

Americans are being trained to denounce their neighbors. There’s something a little sick about so much tattling.

And here’s something that is not only sick, but fatal:

“Tax deal cruises through Senate,” said yesterday’s Washington Post headline. The House is supposed to follow.

Now, you take a place like Italy or Greece. The papers report that there are riots in Italy. And in Greece, anti-austerity demonstrations have turned violent.

You don’t see that sort of thing in the US. Nope. Because in America our public servants really serve.

Some of the members of the Senate wanted the rich to pay more in taxes. Others just wanted to be sure the poor got more unemployment benefits and other giveaways.

But after hours of argument, the world’s greatest deliberative body thrashed out a compromise. Forget the taxes. Forget the cuts. Everybody gets something.

Yes, dear reader, that’s what makes America great. You might think it is reckless to extend the tax reductions, what with the nation going broke and all. Or you might think it hardhearted not to give more handouts to the little guy, what with the Great Correction underway. But it’s always inspiring to see the peoples’ representatives joining hands and doing something that is truly stupid. Lower taxes AND more spending too!

*** Meanwhile, the poor Europeans just can’t seem to get with the program. They’re cutting services. They’re working to balance budgets. They’re raising taxes.

And even still, investors sell their bonds!

No kidding.

“Spain debt yields near euro-era high,” says The Financial Times.

See what good it gets you? You try to do things right and investors stab you in the back.

So you see, the Americans are right. Better to spend, spend, spend…until you go broke.

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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