Dear Diary,
The feds pulled a rabbit out of the hat. We had just been speaking with Simone Wapler, our colleague in Paris.
“I think GDP will come in lower than expected,†we told her. “And then it will be revised downward. Probably negative.â€
We were wrong. Instead, the number that the feds delivered yesterday surprised to the upside. The US economy grew at an annual pace of 4% in the second quarter.
Four percent! Hey, that’s almost like a healthy GDP growth rate.
Well. What can we say?
The feds were right. We were wrong. The recovery is real! The economy is booming! Central financial planning really works, after all!
Now, Janet Yellen can join Ben Bernanke and Alan Greenspan on the cover ofTIMEÂ magazine as a great heroine, a Joan of Arc for the 21st century.
Stepping on the Gas
Wait a minute…
In theory, you can’t create real growth by printing phony money… and pretending to have “demand†that doesn’t really exist.
And in theory, you can’t create prosperity by jacking up the stock market and putting more debt, backed by junky collateral, onto people who can’t pay it back.
Also, there’s no theory that tells us we can build real wealth without saving money… and investing it in new factories, machines, skills, and so forth.
Because it can’t work in theory, we’re suspicious. Maybe it didn’t work in practice either.
Is the economy really booming? Is it making people genuinely better off?
Short answer: Probably not.
But to fully appreciate what has happened we need to go back seven years, to the fourth quarter of 2007. It was then that the credit machine was beginning to sputter. The mechanics at the Fed got out their wrenches and WD-40… and got to work.
The problem is they only have one trick: They gave the thing more gas!
A Gush of Liquidity
By lowering the fed funds rate to between 0% and 0.25%, the Fed claimed it needed to “promote moderate growth.†Then it added almost $4 trillion in electronic “cash†into the system by way of QE.
