The real joke about President Obama’s “built to last” economic recovery is that the White House’s own economists probably don’t buy it. They are surely well aware of Fed models, such as the one displayed in the above chart. It shows that without the monetary steroids being injected by Ben Bernanke’s Federal Reserve, the unemployment rate would be in the mid-9% range rather than its current level of 8.3%.
The White House also likes to point to the rising stock market as proof the economic recovery is real. But this chart from economic analyst Ed Yardeni shows the stocks may have just been reacting to the “monetary morphine” — to use the words of Dallas Fed President Richard Fisher — of the Fed’s various bond-buying programs.
Actually, the whole Fisher quote is worth noting. Fisher says Wall Street has “become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the financial panic of 2008-09, and then kept the medication in the financial bloodstream to ensure recovery.” Maybe the Obama recovery, too.
Yardeni documents how stocks have responded to the monetary morphine:
Let’s review the market’s medical chart to see how it responded to the injections and withdrawals of the Fed’s monetary medicine:
1. The S&P 500 rose 36.4% during QE-1.0, which spanned from November 25, 2008 through the end of March 2010.
2. The S&P 500 rose 10.2% during QE-2.0 from November 3, 2010 through the end of June 2011. It rose much more, by 24.1%, if we start the clock on August 27, 2010, when Fed Chairman Ben Bernanke first hinted that a second round of quantitative easing was on the way.
3. Operation Twist was announced on September 21, 2011. Since then, the S&P 500 is up 15.9%.
4. Between the end of QE-1.0 and Bernanke’s speech on August 27, 2010, the S&P 500 fell 9.0%. Between the end of QE-2.0 and the beginning of MEP, it fell 11.7%.
Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead. Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
Dr. Ed: “Why might Bernanke & Co. opt for this option, which in effect combines reverse repos with term deposits, rather than simply extending Operation Twist? The Fed is running out of short-term securities with which to extend maturities. Hilsenrath reports that the Fed may have only $200 billion of such Treasuries by the middle of the year.”
If Obama does win a second term, he may have the extraordinary monetary actions of Bernanke to thank. But the easy money can’t last forever. The spigot will close and interest rates will rise (as will our debt interest). How will the Obama Recovery function without its monetary morphine? Just how much pain will the U.S. economy endure because we’ve wasted years not reforming the tax code, entitlements, or education?