Can you see the sky from where you are sitting?  If not, go outside and look directly above you. Are there any $100 bills wafting your way?  We didn’t think so. So much for the theory that “Helicopter Ben” would shower America with printing press money if something ever went seriously wrong with the economy. And no one could doubt right now that the economy is indeed in serious trouble -- so serious, apparently, that even the optimists are starting to admit that they see no end to falling real estate prices, one of our bigger problems.

So the question naturally arises, why is the Fed letting this happen?  Haven’t we always been told that the central bank would never, ever let the economy collapse – that it would pull out all the stops to prevent it?  Well, the fact is, the Fed has been pulling out all of the stops – most recently yesterday, when its chairman admitted that no policy other than more easing is being contemplated in an effort to reverse the country’s steepening plunge into recession.

My Neighbor’s House

But if the Fed’s efforts are supposed to be preventing this, they have not noticeably helped my next-door neighbor Jim, who just lowered the asking price on the home he listed for sale less than a month ago. If that is the best that Helicopter Ben can do for Jim -- and for the neighborhood, with its excellent schools, lush golf courses, fabulous shopping, and easy access to good highways -- then how many other homes on the market right now are sinking in value even faster?

Like the inflationists, we have never doubted the Fed would attempt everything in its power to prevent a financial disaster like the one that is currently unfolding.  Where we long ago parted company with them was on the question of whether the central bank's efforts would succeed. For as long as we can recall, the inflationists/monetarists have reassured us that the “Fed would never let it happen.”  However, we became convinced more than a decade ago that debt had grown far too large to manage. That it appeared to be manageable until recently was due solely to the misplaced trust of both borrowers and lenders. Once that trust began to erode, we reasoned, no monetary stimulus short of hyperinflation could possibly reverse the trend. Nothing we’ve seen so far has changed our mind.

Evidence Accumulates

We have more evidence than before to make this assertion, since a last-ditch effort by the Fed to avert a financial collapse is no longer hypothetical, but actual. As such, one thing should be clear by now to inflationists – that the extraordinary steps the Fed has taken to reinflate the economy have been directed almost entirely at institutional lenders rather than individuals. (We ignore the Treasury's $160 billion tax rebate, by the way, since it is just a drop in the bucket relative to total debt.)  The result is that there has been little discernible impact on the economy, only a buildup of reserves on lenders’ books with no corresponding rise in the demand for loans. (Actually, loan demand has been shrinking fast.) 

So, what Helicopter Ben appears to have achieved using measures that even we would concede are hyperinflationary is:  nothing. The banks might be able to pass themselves off as solvent, provided the auditors are in on the con. But merely making the lenders appear not to be bankrupt has done absolutely nothing to achieve what the Fed had set out to do –i.e., re-kindle the housing boom.  In fact, even though some mortgage rates have trended lower, lenders have been under great pressure to tighten their standards. The result is that, on balance, demand from home buyers has continued to fall.

A ‘Crushing’ 5% Mortgage?

We predicted here long ago that, at some point, a seemingly “low” 5% mortgage would become a crushing burden on borrowers. That day has arrived. For if the underlying asset itself –i.e., one’s house – is depreciating in value by as little as, say, 2% per year, that would subject the borrower to a real-rate burden of 7%. Even hedge funds aren’t returning that kind of money these days. Far from it. So just imagine what kind of burden tens of millions of homeowners face as they become suppliers -- to someone else -- of 7% yields. If you factor in the much steeper decline in home prices that has actually occurred, the burden on the homeowner has become staggering in real terms.

For inflationists, it’s time to face the music:  The Fed can no more reverse debt deflation than it can reverse global warming.  As to the theory that a hyperinflation lies ahead, this crackpot idea is so absurd that we would not dignify it by taking the other side of the argument. For what it implies, after all, is that we – you and I, and our neighbors – will eventually get to pay off our $250k mortgages with the money we receive from selling our homes for quadrillions of dollars. Yeah, sure. But until it happens, the spurious logic of inflationists and monetarists deserves no claim on our attention. The notion that the Fed could somehow ameliorate the staggering burden we face in having to pay off tens of trillions of dollars of debt is proving to be one of the most dangerous ideas ever to gain sway over our economic lives.     

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Four Seats Left

The 12 seats I’d allotted for the March 8-9 Hidden Pivot seminar are two-thirds gone.  If you’d like to attend this online event, click here  for further details and instructions on how to register. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.