The Federal Reserve Has No Cure for What Ails the Economy

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The Federal Reserve Has No Cure for What Ails the Economy
Learn why the credit crisis will inevitably conclude in a deflationary depression

By Bob Stokes
Wed, 18 Jul 2012 15:30:00 ET

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On July 17, Federal Reserve Chairman Ben Bernanke's somber tone before Congress inspired these same-day headlines:

Bernanke gloomy on economic outlook -- Financial Times
Bernanke Predicts Slow Progress on Unemployment -- Bloomberg
Why Fed Can't Save Economy, Or Markets 'On Its Own' -- CNBC
Fed Dims View, Weighs Options -- Wall Street Journal
Bernanke is downbeat on economy, no action -- USAToday
The not-so-great and powerful Ben Bernanke -- CNNMoney

Some market commentators say Bernanke's gloomy assessment means more quantitative easing, which in turn will be positive for U.S. markets.

It’s a gloomy Ben Bernanke that makes risk markets happy...Stocks rallied after initially selling off when Bernanke failed to say anything definitive about more Fed easing.

“He was so downbeat about the economy that everybody said he’s going to have to come back with something,” said [the] director of floor operations at [a major investment firm].

CNBC, July 17

But in truth, it won't matter if the Fed pursues QE-3 (still more quantitative easing).

Easy credit has created an unsustainable debt load throughout the society. Nothing can relieve that load except what has always done so: a deflationary collapse. You cannot avoid the consequences of easy credit, just as you cannot avoid the consequences of taking amphetamines for months on end.

Conquer the Crash, second edition, p. 377

The Fed's power is limited.

The subtitle of a July 17 Marketwatch article said:

Fed’s powerless about Europe or U.S. fiscal crisis

The article continues:

The U.S. economy faces two major risks, and there’s nothing Ben Bernanke or the Federal Reserve can do about it. That’s the message Bernanke himself delivered. [emphasis added]

Could some observers be waking up to the fact that the Federal Reserve really is not very powerful? Even Bernanke's predecessor said he was perplexed by the notion that the Fed is the director of the economy.

Let's return to the second edition of Conquer the Crash (p. 123):

It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market.

The very idea that it can do these things is false. Last October, before the House and Senate Joint Economic committee, Chairman Alan Greenspan himself called the idea that the Fed could prevent recessions a “puzzling” notion, chalking up such events to exactly what causes them: “human psychology.” In August 1999, he even more specifically described the stock market as being driven by “waves of optimism and pessimism.”

What will the next wave of pessimism bring?

In a fiat, debt-money system, danger lurks merely in the cessation of credit expansion.

The Elliott Wave Theorist, March 2012

Credit expansion and the money supply have already stalled.

Despite the Fed’s Herculean effort to reflate, the broadest monetary aggregate nevertheless remains below its all time high....the Fed’s quantitative easings and bond-swapping operations are failing in their mission...When [the supply of money and credit] finally collapse, Bernanke’s powerlessness will be exposed and his fate will be sealed as one of the greatest failures in the history of central bankers.

The Elliott Wave Financial Forecast, July 2012

The Federal Reserve will not be able to prevent a global credit collapse.

EWI's Financial Forecast Service offers ideas on how to position yourself. These are ideas you can put to work right away.

The unprecedented build-up of credit in the past 80 years means the economic collapse could be swift.

It's best to prepare now.

EWI is offering a 30-day risk-free trial so you can read our ideas on how to prepare. Plus, you'll get EWI's latest views on U.S. financial markets. Start reading the Financial Forecast Service in moments as you follow this link now.

Tags: banks, Ben Bernanke, central banks, credit crisis, credit rating, debt, deficit, deflation, economic depression, economic indicators, Elliott wave, european central bank, European debt crisis, Federal Open Market Committee (FOMC), Greenspan, liquidity, M3 money supply, monetary policy, monetization, QE2, quantitative easing, Sovereign Debt, Treasury bonds, U.S. Federal Reserve (the Fed), unemployment

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