Search This Blog

Sunday, April 28, 2013

Pay No Attention To That Bernanke Behind The Curtain

First, a review.

Ben Bernanke has been emulating Atlas holding up the world on his shoulders. Thinking that printing money and flooding the system with it would have prevented the Great Depression, Bernanke has been doing exactly that. Critics decried the move, saying that all that fiat money would send the dollar plummeting into the depths, never to rise again. Yet, the dollar has not only held its value, it has risen against every major currency in the last five years. The doubters were either wrong or early.

Indeed, deflation has been Bernanke's saving grace. But, history tells us that the Fed's medicine eventually ends up hurting the patient. With so much free money, banks don't need to lend to make profits. Consumers can't, for the most part, take out loans at low rates—their credit card companies are usurious thieves, borrowing from the Fed at 0% interest rates and lending at exorbitant rates. Food and energy prices continue to rise, cutting into consumer budgets and dragging retail sales (ex-food and energy, of course) down.

What will it take to return the economy to “normal”—assuming such a thing is even possible? Well, as far as we can tell, inflation will signal a return to near-normal. And, we see inflation on the horizon, coming very soon to destroy Bernanke's dream of retiring a hero next year (he's announced he's getting out of government service).

Before he goes, though, he wants you to know that you should expect stock prices to go to the Moon (even if we are incapable of doing so like we did fifty years ago—fifty years of Fed mismanagement, of course). But, look out, folks, inflation is coming soon to a retail establishment near you.

Paul Craig Roberts explains that the recovery Bernanke has engineered has benefitted only the richest 7% of Americans in this post entitled Recovery for the 7 Percent:

“From the end of the recession in 2009 through 2011 (the last year for which Census Bureau wealth data are available), the 8 million households in the U.S. with a net worth above $836,033 saw their aggregate wealth rise by an estimated $5.6 trillion, while the 111 million households with a net worth at or below that level saw their aggregate wealth decline by an estimated $600 billion.” Pew Research, “An Uneven Recovery, by Richard Fry and Paul Taylor.

Since the recession was officially declared to be over in June 2009, I have assured readers that there has been no recovery. Gerald Celente, John Williams (shadowstats.com), and no doubt others have also made it clear that the alleged recovery is an artifact of an understated inflation rate that produces an image of real economic growth.

Now comes the Pew Research Center with its conclusion that the recession ended only for the top 7 percent of households that have substantial holdings of stocks and bonds. The other 93% of the American population is still in recession. http://www.pewsocialtrends.org/2013/04/23/a-rise-in-wealth-for-the-wealthydeclines-for-the-lower-93/

The Pew report attributes the recovery for the affluent to the rise in the stock and bond markets, but does not say what caused these markets to rise.

The stock market’s recovery does not reflect rising consumer purchasing power and retail sales. The labor force is shrinking, not growing. Job growth lags population growth, and the few jobs that are created are primarily dead-end jobs in lowly paid domestic services. Retail sales adjusted for inflation and real median household income have been bottom bouncing since 2009.

To the extent that there is profit growth in US corporations, it comes from labor cost savings from offshoring US jobs and from bringing in foreign workers on work visas. By lowering labor costs, corporations boost profits and thereby capital gains for those 7 percent who have large holdings of financial assets. Those in the 93 percent who are displaced by foreign workers experience income reductions. This transfer of the incomes of the 93 percent to the 7 percent via jobs offshoring and work visas is the reason for the stark rise in US income inequality.

Another source of the stock market’s rise is the Federal Reserve’s policy of quantitative easing, that is, the printing of $1,000 billion dollars annually with which to support the too-big-to-fail banks’ balance sheets and to finance the federal budget deficit. The cash that the Fed is pouring into the banks is not finding its way into business and consumer loans, but the money is available for the banks to speculate in derivatives and stock market futures. Thus, the Fed’s policy, which is directed at keeping afloat a few oversized banks, also benefits the 7 percent by driving up the value of their stock portfolios.

The reason bond prices are so high that real interest rates are negative is that the Fed is purchasing $1,000 billion of mortgage-backed “securities” and US Treasury debt annually. The lower the Fed forces interest rates, the higher go bond prices. If you are among the 7 percent, the Fed has produced capital gains for your bond portfolio. But if you are a saver among the 93 percent, you are losing purchasing power because the interest you receive is less than the rate of inflation.

The Pew report puts it this way: Since the “recovery” that began in June 2009, wealthy households experienced a 28 percent rise in their net worth, while everyone else lost 4 percent of their assets.

Is this the profile of a democracy in which government serves the public interest, or is it the profile of a financial aristocracy that uses government to grind the population under foot?

The answer to Roberts' question is blatantly obvious. The financial aristocracy is using government to grind the population under foot. And, the next big body blow for the public will be overheating inflation, further compressing spending by downsizing the dollar.