The masters of the economic universe met today with Chairman Bernanke of the Federal Reserve following up with his now regularly scheduled press conference.
Bernanke admitted that things aren’t as rosy as the Fed et. al. had predicted, but that things would get better:
As indicated in today’s policy statement, the economic recovery appears to be proceeding at a moderate pace, though somewhat more slowly than the committee had expected, and some recent labor market indicators have also been weaker than expected.
As has been the case generally over the last year, the numbers for our supposed recovery have been less than stellar and less than the experts expected.
Mr. Bernanke did provide his view on why things have not turned around at the expected pace. Here’s his reasoning:
The reduced pace of the recovery partly reflects factors that are likely to be temporary. In particular, consumers’purchasing power has been damped by higher food and energy prices, and the aftermath of the tragicearthquake and tsunami in Japan has been associated with disruptions in global supply chains, especiallyin the auto sector.
So, according to Mr. Bernanke, the unemployment situation, along with the contraction in GDP are a result of higher food and energy prices.
This of course, begs the question: where exactly did those higher food and energy prices come from?
Short answer: money printing (but you knew that already).
If these prices are “likely” to be temporary, what will be the driver for the price declines? Since these prices rose as a direct result of QE and the speculation that it made possible, the ending of QE should lead to the opposite effect – price drops.
In about a week, that will be the case:
The committee’s planned purchases of $600 billion of longer-term treasury securities will becompleted by the end of this month…
If food and energy prices for the consumer are supposed to drop because of the “temporary” nature of their recent price increases, then so too will the entire commodities markets. Since the same QE effect responsible for rising commodity prices was also responsible for rising stock prices, we can postulate that equities in general should see price corrections.
In other words, prepare for stock market declines once QE2 comes to an end and the money stops flowing freely.
This coming drop in prices (stock market or otherwise), according to Bernanke and the committee, is going to be the driving force that will lead to improvement in GDP and the employment rate:
In particular, the unemployment rate is projected to edge down over coming months to 8.6 to 8.9 percent in the fourth quarter of this year, and then decline gradually over the subsequent two years to alevel of 7.0 to 7.5 percent in the fourth quarter of 2013, still well above the central tendency of participants’ longer-run unemployment projections
In short, we expect the unemployment rate to continue to decline, but the pace of progress remains frustratingly slow.
Inflation has moved up in recent months, mainly reflecting higher prices for some commodities and imported goods. In addition, prices of motor vehicles have risen notable, as a result of the recent supplychain disruptions.
However, as the effects of these factors dissipate, the committee anticipates that inflation will subside in coming quarters to levels at or below its mandate-consistent rate, as shown in the figureentitled “PCE Inflation.”
We can certainly see the possibility of the official unemployment rate drop over coming months and years. This, however, does not mean that people will actually be finding work. As we’ve noted in the past, millions of people will be dropping off of official unemployment roles because they are unable to find meaningful labor. They will no longer be counted. With this logic, we may actually approach the Marx target of 0% unemployment over the long-term.
The entire price valuation system in America (and most of the world) has been hijacked. Everything from stock markets and housing prices to GDP and the US dollar are a direct result of the artificial manipulations by the Fed.
Jim Grant provides an insightful explanation:
I think the difficulty with the Fed, generally, is that it is imposing false values across a range of markets. It has given us a zero percent funds rates, it has through this agency levitated the stock market, it has depressed or helped to depress the value of the dollar exchange rate. It is in the business of imposing false values. My suggestion is that we learn to live in a world of transparently objective values and for that the Fed might just take a little rest.
Considering how right Ben Bernanke has been up until now, and considering that his entire forecast is based on the idea that prices in food and energy will “likely” go down in the near future, we are expecting continued economic pain going forward.
Although Mr. Bernanke is a scholar of the Great Depression and uses lots of fancy words most of us can’t understand to explain to us how things are going to be better really, really soon, even he himself admits that they have no idea what is going on right now:
We do believe that growth is going to pick up going into 2012, but at a somewhat slower pace than we had anticipated in April.
We don’t have a precise read on why this slower pace of growth is persisting. One way to think about it is that maybe some of the headwinds that have been concerning us, like, you know, weakness in the financial sector, problems in the housing sector, balance sheet and de-leveraging issues. Some of these headwinds may be stronger and more persistent than we thought.
And I think it’s an appropriate balance to attribute a slowdown partly to these identifiable temporaryfactors, but to acknowledge the possibility that some of the slowdown is due to factors which arelonger-lived and which will be still operative by next year.
In effect, Mr. Bernanke totally underestimated the effects of Fed intervention on creating the housing bubble and the potential for recession, saying in 2005 and 2006 that it was a “pretty unlikely possibility”:
Once the bubble popped, he then totally missed how the largest housing bubble in history would impact the broader economy when he suggested to the American public that the sub-prime debacle was contained:
We now know that QE1, QE2, and everything else they’ve thrown at this crisis has been a huge fail.
Are we now supposed to believe the powers that be have figured out how to navigate through these so called (hurricane force) headwinds?
The people in charge of our monetary, economic and fiscal policies have no clue what to do. They have fired all of the bullets they had and nothing is working. Fundamentally, we’re worse off now then we were four years ago.
Prepare for another widespread financial and economic “emergency.”