by Mike Whitney
Here’s your economics quiz for the day:
Question 1– What do you think would happen if you put $3 trillion into the financial system?
a–Stock prices would rise
b–Stock prices would fall
c–Stock prices would stay the same
Question 2– What do you think would happen if you put $3 trillion into the economy? (Via fiscal stimulus for infrastructure projects, extended unemployment benefits, food stamps, etc)
a–Activity would increase and the economy would grow
b–Activity would slow and the economy would shrink
c–Activity would stay the same, so growth would remain unchanged
If you picked “a” for both questions, then pat yourself on the back because you got the right answers.
Now try to answer this one, last “bonus” question:
Question 3– If adding money to the financial system boosts asset prices, and adding money to the economy boosts growth, then why did the Fed add $3 trillion to the financial system expecting the economy to grow?
Is the Fed confused about how the economy works? Is the Fed confused about how the financial system works?
Probably not. There’s probably some other explanation altogether, after all, why would someone put gas in their radiator when the gas-tank is empty. That’s not going to provide fuel for the engine, is it? The same rule applies to stimulus. The only way stimulus can work is if its put where it’s needed. And we can now say with 100 percent certainty, that the Fed’s stimulus wasn’t put where it was needed which is why it hasn’t worked.
How do we know that?
Just take a look at GDP. Second Quarter GDP came in at a dismal 1.2 percent even though interest rates are still locked at near-zero and the Fed is still recycling the cash from maturing bonds into more government debt.
Do you know what 1.2 percent GDP means?
It means that spending is weak, business investment is anemic, personal consumption is in the toilet and credit growth is kaput. It means that the economy has basically stopped breathing, been taken off the respirator and is being rushed to the morgue for embalming before rigor mortis sets in. It means that the people who are assigned the task of managing the system either don’t know how the system works or have an ulterior motive for the policies they’re using.
So, which is it? Is the Fed a moron or a liar?
Now we’ve all heard the expression, “The definition of insanity is doing the same thing over and over again, and expecting a different result”.
Well, the Fed has been doing the same thing for the last seven years — dumping money into the financial system while predicting stronger growth. That would seem to suggest that the Fed is insane, but is the Fed insane?
No, in fact, the members of the FOMC are extremely-bright, well-educated professionals who have a solid grasp of the economy and the many intricacies of the financial system. These are smart guys, real smart. So, maybe they have an ulterior motive. Maybe that’s why they’ve stuck with the same failed policies all these years.
But if they have an ulterior motive, then what is it? What are they trying to achieve?
The easiest way to answer that question is by simply following the money. We’ve already seen that QE and zero rates have done nothing for growth, so –the question is– where have these policies had the greatest impact?
Why, the stock market, of course!
Did you know that the Dow Jones Industrials (DJIA) bottomed on March 9, 2009 at 6,507. As of Thursday (9-15-16), the Dow finished the day at 18,211 nearly three times higher. The same goes for the S and P 500 which slipped to 676 in March 2009, but rebounded to 2,147 as of yesterday afternoon. Then there’s the Nasdaq which fared even better bouncing back from an abysmal 1,268 in 2009 to a lofty 5,249 yesterday.