Article published Wednesday, June 8, 2011, at Fox News.

Even Bernanke Can't Deny That Obama's "Recovery" Is Bad

By John R. Lott, Jr.

Federal Reserve chairman Ben Bernanke couldn't deny the obvious in his speech Tuesday in Atlanta. The economy is bad, with Obama’s “recovery” is setting records for being anemic and the unemployment stuck above 9 percent. Almost 5 million Americans have completely given up looking for work and left the labor force since the "recovery" that started in June 2009.

GDP growth the seven quarters into the Obama recovery has averaged an annual rate of only 2.8 percent, a fraction of the 4.6 percent average growth during recoveries since 1970.

And this recovery would have been even worse if the Federal Reserve hasn't been pumping in trillions of newly printed dollars into the economy, with the so-called "Quantitative Easings" 1 and 2. The current round of this injection, QE2, is scheduled to end on June 30th and will end up putting in almost $900 billion ($600 billion from buying government bonds and $280 billion from buying mortgages). But the Bernanke's announcement today of a new round of printing money is bad news.

Some of recent money injections offset the slower rate that money was being transacted (what economists refer to as the "velocity" of money). But the increase in the money supply has done more than offset that lower velocity. Inflation is on the rise. The additional money lowers the value of the dollar.

Over the last year, inflation hit 3.2 percent. But that number hides how the rate has been growing. Over the last six months the annual inflation rate was 4.6 percent. Over just the last three months, the annual rate was 5.6 percent.

Last November, Federal Reserve Chairman Ben Bernanke justified "Quantitative Easing 2" in a Washington Post op-ed this way:

“Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

But this policy only works if investors make mistakes. The notion is that if the government's new money buys up lots of Federal Reserve bonds and mortgages, it will raise their prices. Higher bond prices mean that the fixed return paid on those bonds give a lower rate of return, a lower interest rate.

If you are going to lend money, you had better make sure that it is more than covering the inflation rate. You aren't going to lend someone money at 3 percent interest if inflation is 5 percent, or it is like you are paying the borrower 2 percent to borrow your money. Unfortunately, that is pretty much the mistake that the Federal Reserve is hoping that lenders make. Printing up money to buy bonds only lowers interest rates if markets don't anticipate the higher inflation rate.

With the latest home price indexes and new home building hitting new lows, it is pretty hard to see Bernanke's policy helping housing the way that he predicted. Part of that is simply because all the money he wants to throw at housing can't offset the Obama administration's disastrous regulations. Putting pressure on mortgage lenders to write-off large portions of loans, makes those loans much riskier. Who wants to make new loans if those new loans may also face huge new pressure to be written down in value?

Americans have seen this story before, back in the 60s, 70s and early 80s. Government would print up money. Companies and workers would see the amount people were willing to pay and think that there was an increased demand for their products. More people would get hired, lowering unemployment. But when inflation showed up, everyone would realize that their products weren't really in greater demand, it was just that all the new money they were being offered was worth less. Firms would cut back production. Workers would leave their jobs when they were asked to take salary cuts.

When new elections approached, government would print up even more money again to try to temporarily fix things so voters wouldn't throw the politicians out of office. The problem is that we kept on having to have higher and higher levels of inflation to reduce unemployment and the result was stagflation -- an economy with both high unemployment and inflation. The current inflating makes the tiny improvement in employment during the Obama recovery all the more depressing.

In theory, the newly injected money was always supposed to be withdraw before inflation hits, but political reality over not wanting to slow the recovery and just the mechanics of figuring out when to withdraw the money always prove a lot more difficult in practice.

No matter how much money Bernanke prints up, he can’t overcome the damage being done by the Obama administration and fix the housing crisis. But stagflation won’t be the only damage done by more “quantitative easing” of the money supply. Whatever “improvements” it creates are short-lived and result only from tricking people to make mistakes that they will soon regret.

John R. Lott Jr. is a contributor. He is an economist and the author of "More Guns, Less Crime (University of Chicago Press, 2010), the third edition of which was published in May.".

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