The current economic situation in the U.S. is perplexing. While the Federal Reserve is aggressively pumping money into the economy, the economy appears to be deflating. How can this be happening simultaneously?
This contradiction feels akin to the concept of jumbo shrimp or an ashtray marked “no smoking.”
If the Fed is actively bolstering the economy, what accounts for its deflation? How can it be that the economy is in decline despite these efforts?
Yet, this is precisely what we are witnessing…
According to MarketWatch, “In its first estimate for the first three months of the year, the Commerce Department reported that gross domestic product (GDP) rose at a 1.8 percent annual rate between January and March.” However, when examining final sales—excluding inventory changes—the situation looks far bleaker, with only a 0.8 percent increase.
Meanwhile, the Federal Reserve is injecting $2.5 billion of new money into the economy each day. With such substantial cash flow, one might expect better than a 0.8 percent uptick in the economy. Instead, the Fed’s actions have led to various market distortions…
Follow the Money
Clearly, Fed-induced money creation isn’t translating into a healthier economy. Recently, the Labor Department revealed a rise in new applications for unemployment benefits, which jumped by 25,000 to a seasonally adjusted 429,000 for the week that ended on April 23rd.
If this influx of cash isn’t benefiting the actual economy, where is it going?
The answer lies in following the money. It doesn’t take deep investigation to realize that funds are flowing into financial markets rather than the real economy or housing. For instance, year-to-date gains in the stock market, as measured by the S&P 500, are up 8.43 percent. Oil has surged by 22 percent, gas prices at the pump have climbed 23 percent, gold and silver have seen increases of 13 percent and 60 percent, respectively. Over the last year, the food price index has risen by 32 percent. Essentially, nearly everything is climbing in price, except for the value of the dollar.
In fact, the dollar is on a downward trend; year-to-date, it has decreased by 7.59 percent according to the dollar index. This depreciation effectively negates any stock market gains. When accounting for broker fees, most investors may even find themselves facing net losses.
But what about individuals who don’t invest in stocks? Their incomes remain static, while prices continue to rise, effectively taxing their earnings through inflation.
Cash and Credit Created from Thin Air is Not Real Wealth
The market distortions caused by such monetary mismanagement are not only troublesome in the short term but could lead to catastrophic consequences when things turn south. History shows us that what goes up must eventually come down.
When the next market crash occurs, we might face a scenario reminiscent of late 2008, marked by the collapse of Lehman Brothers, a government bailout of major banks via AIG, and significant liquidity injections by the Federal Reserve. At that point, it will become evident that the issues stemming from the housing bubble never truly disappeared; they were merely concealed by a temporary surge of liquidity.
Clearly, the Fed’s intrusions in the economy have not yielded positive outcomes. Rather than fostering growth or reducing unemployment, their strategies have inflated prices and turned financial markets into speculative arenas.
In reality, the Federal Reserve might have caused less damage had they simply disposed of the $2.5 billion in daily cash rather than injecting it into the system. While unemployment could still remain high and the economy continue to struggle, at least gas prices might not be hovering near $4 a gallon.
It’s apparent that even a child can grasp the idea that cash and credit created from nothing do not equate to genuine wealth. However, when faced with advanced economics courses, even bright students may become swayed by complex models and theories, leading to misguided beliefs.
Given the chance, they may inadvertently unleash chaos in an effort to validate their theories. When proven incorrect, they often double down, creating even more turmoil.
Sincerely,
MN Gordon
for Economic Prism
Return from Cash and Credit Created from Thin Air is Not Real Wealth to Economic Prism