[8]
[8]If there is one thing we should have learned from recent data is that you can "juice" the economy by inserting more money into it because when the money works its way through the economy, certain economic data will become more positive.
This is not a difficult concept to grasp. For example, if in a hypothetical economy there is a $1 trillion money supply and then it is increased by, say, 10%, assuming that new money is spent in economic activities, GDP will ultimately rise more or less by 10% because GDP measures spending. More money equals more spending, thus higher GDP.
During this phase one might see manufacturing and consumption increase and even employment grow. This happened with QE1 and 2. However, one might ask, if money stimulus actually revives real economic growth, why did we need QE2? Of course this is the flaw in the above argument. It doesn't work.
These naive monetary theories don't work to create real growth, they just make the numbers go up ... temporarily. QE 1 or 2 did nothing to cure underlying economic problems or create lasting real growth. If QE had worked the economists at the Fed wouldn't be scratching their heads over the current negative economic data that has been pouring out recently. Today's unemployment report is a good example of this.
The BLS announced that only 80,000 new jobs were created in June, 2012, and the unemployment rate remained at 8.2%. Here is a good synopsis of the report from Econoday [9]:
[10]
For a picture of the trend, this is also from Econoday:
[11]
As you can see, the first quarter job situation has been collapsing. There are still 12. 7 million Americans unemployed, 41.9% of the unemployed have been so for more than 27 weeks, and the broadest measure of unemployment (U-6) was 14.9% (+0.1%). For those of you wishing to see the so-called "U" data, please go here [12].
These results and the other data [13] that we have been commenting on demonstrate the ineffectiveness of the Fed as a kind of super-technocratic presence behind the economic curtain who through their wisdom and benevolence have the ability to successfully guide the economy. With declining numbers, the Fed is being exposed as the Wizard of Oz that it is. They should just admit that nothing they or the Administration has done has worked and perhaps question their theories.
What can we expect as a result of this report? Going back to my article on last month's employment report [14], it is this:
1. The Administration is seriously concerned since an election is only 5 months away.
2. The Fed is seriously concerned since none of their monetary policies are working as planned.
3. “Inflation” as the Fed defines it is looking more like the much feared “deflation.” The Fed will not let “deflation” happen.
4. The only thing the Fed really knows how to do is print money, and since the inflation hawks on the FOMC have nothing to complain about, it makes another round of quantitative easing likely. And soon.
Now that our trading partners around the world, especially in the Eurozone, are failing for the same reasons, there will be even more pressure on the Fed to "do something." While they are trying to avoid another round of QE, I think there will be serious pressure from the Doves in the Fed to print. This will result in temporary market euphoria as the new money finds its way into the financial markets, but the Fed will discover that this third round of printing will have a weaker effect on the economy just as the result QE2 was weaker than QE1's [15]. That means it will quickly fade and economic growth will continue to stagnate [16].