How the Fed Failed to Repair the Economy… and Why

According to a recent Federal Reserve report, American wealth clocked in at $99 trillion in the first quarter of 2015, setting a new record. More than two-thirds of this is in paper assets, with the remaining third in housing and other assets.

While the value of all consumer real estate has yet to eclipse its previous peak set in 2006, the equity and debt markets have ramped up over the past six years… even as economic activity remains sluggish and wages stagnant. This probably has a little bit to do with the Fed printing over $4 trillion and force-feeding all the money to the banking system.

Unfortunately that’s about where the story ends. The Fed printed money. Financial assets exploded higher. Wealth increased dramatically. What hasn’t happened is a knock-on effect that benefits middle America. The ballooning wealth created over the last half decade remains firmly in the hands of a small percentage of people, thanks to paper assets they’ve accumulated along the way.

This isn’t a rant against wealth or one-percenters. Instead, this is a simple assessment that the Fed’s efforts to right the economic ship by printing massive amounts of cash have failed in every way. Not in every way but one — “what about the equity markets?” — but in every way. Rising equity markets do not spread benefits far and wide across the land.

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A couple of years ago I wrote that the Fed was attacking unemployment all wrong. They were printing roughly $75 billion per month and buying bonds, hoping that a combination of more liquidity and lower interest rates would spur borrowing and lead to a jump in economic growth.

If they were going to do that, why not just hold a lottery among all who were unemployed! They could’ve picked 750,000 “winners” at random, then given these lucky contestants $100,000 over the course of the next year. The caveat is they would’ve had to spend it all, and neither receive unemployment benefits nor take a job during that time.

Doing this would have shaved half a percent off of the unemployment rate each month, while putting cash directly into the hands of consumers. The winners could’ve even used the money for education to learn new skills.

Think about how beneficial such a program would have been! Instead of shoving more money into the excess reserve accounts of banks, those greenbacks would be zipping around the economy right now. What’s more, it would not have taken trillions of dollars to achieve success.

A mere $750 billion of new money directed in this way would have lowered unemployment by 5% and created a firestorm of new cash in the system. Ordinary people would have received the money. Spending would be up. Inflation would have ticked higher. What’s not to like?

Of course, I say all this somewhat tongue-in-cheek. I’m not a fan of printing money then directing it through a pipeline from central bankers to citizens. In fact, I’m not a fan of money printing in general. But there is a group that is taking this seriously… and their qualifications might surprise you.

As the European Central Bank geared up to implement its own quantitative easing (QE) program earlier this year, a group of well-known economics professors signed a letter calling for more direct intervention. Coming from the College of London, the London School of Economics, and Kingston University, among others, they noted: “Conventional QE is an unreliable tool for boosting GDP or employment.”

They went on to reference research by the Bank of England that showed QE benefits the well-off while doing little for the poorest in society. With interest rates low, the group felt more liquidity would do little to jump start the economy.

We couldn’t agree more.

They went on to suggest that the ECB use newly printed euros to fund infrastructure projects. That would directly boost employment. They also recommended the central bank simply send every euro zone citizen 175 euros per month for the expected duration of the QE program (19 months). They could use the money to pay down debts, or simply spend as they see fit.

Maybe they dusted off my article from a while back, but I doubt it. I was just joking. These people are serious!

They have a point. Printing money and sending it directly to consumers would definitely provide a broader boost to the economy than simply driving up financial assets. The problem is, it would still be an artificial bump. Worse, it would extract value from savers.

But that’s not the reason central banks won’t make such a move. When a central bank prints money and ships it off to a third party, it takes the central bank out of the picture. However, when a central bank uses the newly printed currency to buy assets, it retains control over the assets and thereby stays in the game. The bank can influence economic activity by choosing when and how to divest of the asset. It keeps the world guessing, and it keeps them in power.

So under the current system, small groups of central bankers maintain their access and control over economies by purchasing assets, and the benefits they create flow to small groups of wealthy investors.

As for the everyday citizens, they get the joy of earning below-market rates on their savings and deposit accounts. Everything would be alright if they only borrowed more… or so says the central bankers.

Rodney Johnson

Rodney

Follow me on Twitter @RJHSDent

Categories: Central Banks

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.