Stimulating economic growth (QE2) didn’t work. Now what?

In December, I asserted that we’re inevitably heading into a prolonged period of high inflation. I also asserted that stimulus spending won’t reignite economic growth because we’ve simply passed the point where marginal productivity of debt has turned negative. Namely, each Dollar of new debt generates negative economic growth.

Five months and nearly $600 billion later, we’re nearing the end of the Federal Reserve’s second round of quantitative easing, and the results – even with various government agencies sloppy book cooking – are dismal:

EMPLOYMENT: The percentage of the population who are employed declined from 58.5% last August down to 58.4% now. If you wish to go by the official BLS statistics, the economy added 700,000 new jobs (at $600 billion, that’s $850,000 of new debt to create a single job).

ECONOMIC GROWTH: it’s slowed from 2.6% last summer to 1.8% now.

INFLATION: Depending on who you ask, inflation has risen to 10.7% (according to John Williams of Shadowstats). A New York Post survey showed that in New York City, annual rate of inflation is 14%. Or if you wish to go by the official figures, the rise was from 1.2% before QE2 to 3.2% in the 12 months ending in April.

HOUSING: During the first three months of this year, fewer new homes were sold in the U.S. than in any three month period ever recorded. According to the National Association of Realtors, the average price of an “existing” home has dropped by another 8%, from $177,300 in August, just before QE2, to $163,700 today.

Let’s be fair – stimulus spending did produce some positive and even impressive results. Since Bernanke announced the QE2 program on 27th August 2010, the S&P 500 has risen by 26% creating a “wealth effect” for the american (and foreign) stockholders. Too bad that 50% of all stock and bond investments are owned by only 1% of Americans. Because while QE2 did good for them, it’s hard to see how they’ll be able to up their consumption in order to continue stimulating the economy and job creation. They’d have to get 10 haircuts a day, eat 100 loaves of bread, have their shoes polished like, constantly, use 2 rolls of toilet paper per day, and so on. I just don’t see how they could possibly pull it off. Spending that kind of money is not easy.

Now for the second part of today’s post’s title: now what? Now INFLATION!

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