Economic Danger Ahead? Negative GDP Growth and Soaring StocksFebruary 4th, 2013
The mainstream media is doing everything in its power to downplay the fact that the US experienced negative economic growth during the last quarter of 2012. Alleged TV news experts blame this on imaginary sequestration cuts that haven’t happened yet and largely never will. Meanwhile, the Dow Jones Industrial Average is soaring to record heights.
Stimulus fans claim that record-testing Dow levels prove that the economy is back on the path to prosperity. However, recent crises in places like Zimbabwe have demonstrated that record industrial averages sometimes indicate that serious inflation is on the way. With the Gross Domestic Product slipping into negative territory just as the DOW hits new heights, could we be on the cusp of significant price inflation?
Inflationary Pressure Delayed
Economists sometimes misunderstand inflationary signals. Some think that Federal Reserve policy isn’t inflationary simply because price inflation itself lags by several quarters before it affects consumers. When funds are allocated through the appropriations process, it takes a long time before a federal worker or dependent cashes it in the form of a paycheck or subsidy. When the Fed issues new money to banks, lenders sometimes hold on to it before issuing it to consumers. As such, inflationary pressures snowball several quarters later, sometimes exponentially, and always when it’s too late to change course.
The Dow, however, would likely read inflationary data before prices rise on consumers. Companies receiving corporate welfare often benefit from additional private investment during economically insecure times like this. Investors pile on when they know their funds are matched dollar-for-dollar by state funds. However, receiving corporate welfare is rarely a profitable line of work. It might let a company show profits temporarily, but make-work projects are not stimulated by consumer demand. As a result, any nominal stock increases caused by corporate bailouts will only recede once budgets are cut, and, as such, they don’t strengthen a company for the future. When new money is introduced to an economic system without an increase in the number of products that consumers actually need, the only possible result is inflation. Without the pricing mechanism of the marketplace (which is distorted by the Fed’s interest rate manipulations), companies overproduce products that people do not need using resources that should have gone to something else.
What Happens When the Fed Raises Interest Rates?
When quantitative easing was first introduced as a policy idea, Bernanke indicated that the challenge for him would be deciding when to raise interest rates. He admitted that too much inflation could harm the economy and that his goal would be to keep the cheap credit flowing until the last possible second, at which point he would raise the rates to prevent inflation from slipping out of control.
However, the Federal Reserve’s balance sheet has taken a tricky turn lately. The Wall Street Journal is reporting that the Fed, a private bank, is set to lose money year-over-year if it raises interest rates. Ordinarily, the central bank profits handily and turns over a portion of those proceeds to the Treasury. Will the Federal Reserve’s governing officials choose to raise rates when doing so would cause it to lose money? Will they instead just print money to cover their losses, thus defeating the purpose of raising rates?
Will Bernanke’s rate hikes come too late, simply causing additional credit contraction after price inflation hits the consumer? Is the current boom in the Dow Jones Industrial Average really just a web of nominal stock increases caused by market-distorting corporate welfare and inflationary credit injections from the Fed?
The corporate news media claims that the negative GDP report is actually good news. We’re being told that record stocks are a sign of an impending recovery. Meanwhile, there is a debt bubble waiting to explode. Commercial real estate is in trouble as many retail stores are on the verge of becoming obsolete. A significant percentage of government-backed student loans will never be paid back. Even worse, the market is currently buoyed by inflationary pressures that may turn into price inflation at any moment.
Record-setting scores on the Dow Jones Industrial Average may be more of a warning sign than a symbol of renewed prosperity.
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