Isn’t that what got us into trouble in the first place?

by Nigel Bolton-Shaw on October 3, 2012

We learn from Bloomberg that investors are skeptical “that the Federal Reserve’s announcement of additional quantitative easing will get Americans to spend more.”

Bloomberg quotes Performance Trust Investment Advisors’ Chief Investment Officer, Peter Cook, as saying, “Aggressive monetary policy, such as QE3, probably will have a limited impact on consumer spending for nonessential goods and services, so the economy will continue to slow.”

The idea is that QE3 – the third Federal Reserve easing – is intended to revive the circulation of money in the US economy. But Cook doesn’t seem to believe it will do the trick … and we are not so sure it would be a good thing anyway. (From a theoretical standpoint anyway.)

As we’ve pointed out previously, we’re not even sure that Fed officials are really so concerned with consumer spending. They are concerned with stock prices (less with bond prices) and they are concerned with bank balances but general macro-economic issues seem to come farther down on the list. Here’s some more from the article:

The relative performance between these funds since August suggests investors “bought the rumor and sold the news,” said Peter Cook…

The recent weakening in discretionary stocks relative to staples differs from 2010, when Fed Chairman Ben S. Bernanke’s speech at the annual Jackson Hole, Wyoming, conference in late August foreshadowed QE2, setting off almost six months of outperformance, said Jack Ablin, who helps oversee about $65 billion of assets as chief investment officer at BMO Private Bank in Chicago…

Now that a third wave of easing has become reality, continued lackluster job growth and the looming fiscal cliff may temper investor sentiment, according to Cook, who helps oversee more than $480 million in assets. If the economy slows further, the central bank could undertake additional action, making a “pro-growth strategy attractive, at least in the short-term again.”

Our perception regarding consumer price is based on theoretical free-market concepts, not on the practicality of Fed efforts. But theory is enlightening when it comes to consumer spending. What the media invariably declines to point out is that there must be demand to satisfy for “easings” to be effective.

If there is no demand, then money will neither circulate nor achieve velocity. This used to be called “pushing on a string,” but these days the financial media seems loath to explain, let alone confront, Fed policies.

But from our point of view, the larger issue regarding consumer spending has to do with asset bubbles. The current environment is the result of one such asset bubble. Is it really a wise idea to create yet another one?

We live in a stimulative era. In fact, the argument can be made that a “normal” economy no longer exists Central bank price-fixing of the price and value of money are constantly expanding and contracting demand … but artificially. This is the result of a pure fiat environment.

Lately, because of all the economic chaos, the idea of a gold standard is creeping back into the mainstream media conversation. Such standards (gold, or gold and silver) would discipline governments and make it impossible for central banks to inflate with abandon.

Central bankers want consumer spending – and tinker with rates and the money supply to get it – because such spending covers up a multitude of monetary sins.

But far more preferable is leaving consumer spending – like the volume of money itself – to be rationalized by the market rather than policy planners.

The current slump in consumer demand is surely an outgrowth of the previous raging demand for consumer and financial products that marked the mid-2000s. While it would be nice, presumably, to see consumer demand pick up, do we really want it do so as a result of central banking policy?

Isn’t that what got us into trouble in the first place?

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{ 4 comments… read them below or add one }

ManAboutDallas October 4, 2012 at 3:18 am

Well, if insanity is defined as doing the same thing over and over and expecting a different result; and the whole world is demonstrably insane, then it all makes perfect sense doesn’t it ? Say…. wasn’t that a White Rabbit I saw popping down that rabbit hole; and listen ! I do believe I hear the sound of a Tea Party going on … why yes, it’s that sly ‘ole devil, the Mad Hatter himself !

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carlos martijena October 4, 2012 at 3:50 am

Consumer spending is a function of consumer income. Consumer income is a function of employment. Consumer confidence also influences spending. No surprise, with true unemployment over 20%, lower incomes for the large majority of consumers and low confidence in the current government, consumer spending is down and will continue down until the structural reforms required to correct unemployment and low incomes are in place. No amount of excessive money creation will raise consumer spending. People are mostly rational and see our current economic situation.

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therooster of Christ October 4, 2012 at 4:34 am

Currency supply inflation is simply “the stick” that drives people to precious metals in a process oriented migration away from debt and toward a market driven gold standard in real-time. A modern real-time (floating) gold standard can only be implemented from the grass roots, organically and bottom-up, because to to take a top-down approach would only serve to crash the legacy system of the USD far too quickly and abruptly. Hail to “the stick” !

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RUSS SMITH October 4, 2012 at 7:35 am

Hi!, Patrons Of Global Speculations Et Al:

Here we are like the proverbial dog chasing its’ own tail running around in circles without geting anywhere over and over again. We already tried Bretton Woods which defined the US $ as a 35th of an oz. of gold in an alloy 9/10ths fine and the dollar was supposedly redeemable to gold @ that rate but, when push came to shove on August 15, 1971, President Nixon renigged on the promise to foreighn creditors shutting the US Gold Window in their face. Look @ the consequences we’re still enduring today & with gold tracking our misdeeds with is’ decade long rise in price with some saying gold has at least another decade to go rising its’ price in the face of the QE to eternity practices now undertaken @ the Fed. Nobody knows for sure what the ultimate price of gold can be under these fiat influences. Would a return to a similar arrangement as Bretton Woods under the guise again that the agreed upon monetary arrangement represents another attempt to found a gold standard insure all concerned that that’s the point that the dog can finally stop chasing its’ tail? What are the guarantees as measured against our experiences over the past 40+ years? Nothing seems dependable that would lock in currency values under all circumstances at the upper ends of their trading ranges which allows instead for creeping failure to once again rule the currency kingdom bringing us back to another round of what we’ve now got. Who do you trust with this assignment for the next 40+ years?
Why are we totally disregarding OUR Constitutional standards as found in Article 1; Section 10 which commits US to minting gold coins from the gold repositories such as Fort Knox, Kentucky etc.? As long as we try backing fiat currencies with their mere shadows of wealth represented by the Feds.’ printing press tied into the Banks’ Fractional Reserve Banking System that prints additional fiat money continuously, we will coninue to experience the downfall of the American Empire until dust do we part. The Fed. would be put completely out of business if it had to pay up its’ obligations in specie gold and silver coins that can not be produced without minting the minable materials hidden within the private vaults of Mother Earth. .
Daniel Webster regards his views of inflation: “Of all the contrivances devised for cheating the laboring classes of mankind none has been more successful than that which deludes them with issues of irredeemable, paper money!!”

RUSS SMITH, CALIFORNIA (One Of The Broke States)
resmith@wcisp.com

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