When False Premises Become Economic Policy

“A shame that we can’t see Japan because of the marine layer,” I said, and we both laughed because it was so silly. We were looking west from the top of the cliffs across the Pacific, and what we saw was a gray layer of fog just above the waves some distance offshore. That day we were lucky; often, the marine layer invades the Bay Area’s coastal strip, including much of San Francisco.

The premise that it would be possible to see Japan from the Pacific Coast if it weren’t for the marine layer is just as false as the premise that a healthy economy can result from running up huge deficits and printing money to monetize them. Yet, that’s the line propagated by the status-quo media and its economists. Sunday, the New York Times did it again.

“Evidence shows that quantitative easing boosts the economy, and there is no reason to believe that it feeds directly into inflation without supporting growth,” it quoted Martin Weale. He sits on the Bank of England’s Monetary Policy Committee, which voted on Thursday to restart the printing presses in a massive way.

The Fed has been following the same strategy, but its numbers are much bigger. It printed trillions of dollars and handed them over to its cronies. Monetization of debt and forcing interest rates to near zero has completely insulated the US Government from the budgetary discipline that credit markets can otherwise impose—and Congress went hog-wild, running up deficits that are near 10% of GDP. As a consequence, US gross national debt has shot up to 100% of GDP.

OK, the Fed and Congress bailed out Wall Street and enabled large corporations to borrow money essentially for free (among other benefits). But has that improved the real economy?

Unemployment is at catastrophic levels. U-6, the broadest measure of unemployment and underemployment has edged up to 16.5%.

Inflation is heating up. CPI is up 3.8% from a year ago. While commodities have come down some, red-hot inflation from China has worked its way through the supply chains.

Real wages dropped 1.8% from a year ago, continuing a 12-year trend. From the wage peak in 1999, they have dropped 8-9%, depending on the formula (the Census Bureau reported a decline of 7.1% from 1999 to 2010, not counting the decline since). In other words, purchasing power has been sapped.

The Fed’s stated policy of forcing yields across the yield curve below the rate of inflation constitutes financial repression of savers, fixed income investors, and pension funds. Cash flows dwindle into nothingness, and inflation eats up principal. Financial repression is destructive: it lowers the income and real wealth of conservative investors (retirees, for example) and demolishes their ability and willingness to spend.

The victims of unrestrained borrowing and printing are everywhere: The middle class taxpayer—and 46.2 million Americans live in poverty, more than ever according to the Census Bureau. But no economy can thrive when the middle class is in decline. So why exactly would more of the same policies suddenly improve the economy?

It’s a false premise. Like blaming the marine layer for not being able to see Japan from the West Coast. And it’s just as silly. Unfortunately, the status-quo media and its economists have been preaching it for so long and with such utter abandon that it has become a public truth. But unlike the first false premise, this one isn’t a laughing matter.

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