Ah, so that’s what Ben Bernanke is up to!
Bernanke, of course, announced last week that he would allow the Federal Reserve to purchase $600 billion more in government bonds over the next eight months. That’s referred to in polite society as “quantitative easing,” which is just another name for debasing the value of the dollar by printing — electronically, these days — piles of additional currency.
QE was tried last year and didn’t do much for the economy. But QE2 was announced last week anyway, and there are a lot of folks who don’t think it’ll do much good this time either.
So why is Bernanke even bothering, considering how much ill will this could create in places like China, which holds massive amounts of dollars in the form of US government debt?
“Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action,” Bernanke said after QE2 was announced last week. “Easier financial conditions will promote economic growth.”
Let’s analyze this mostly ignored statement.
Yes, interest rates did fall — a little since September. But they were already low enough for anyone wishing to borrow.
And economic growth is running at only about 2 percent a year. And that will likely decline in the fourth quarter because most of the third quarter’s growth was the result of companies building inventories, not selling stuff to customers.
It’s like when your family lives off the canned soup that’s already in your cupboard. You don’t have to go out and buy any more food until you run out.
The economy will be eating soup in the fourth quarter of this year.
So that leaves Bernanke’s comment about the stock market.
Stocks have had an enormous, nearly 10 percent rise since early September when rumors started spreading that the economy was doing so poorly that the Fed would have to act, whether it was wise or not. Over summer stocks were weak because of the slumping economy.
Back in late August, in fact, I wrote a column that suggested that the Fed should “rig” the stock market because of all the bad things that tend to happen in the fall.
I explained that rumors about another quantitative easing were necessary to get stocks higher and that the Fed already seemed to have begun that whisper campaign.
And while improving stock prices aren’t really doing much right now to make Americans feel richer (because many people have given up on Wall Street or are still trying to recover previous losses), a decline in the markets certainly would have made folks feel poorer.
That’s why Bernanke’s remark last week about the stock market’s positive reaction was so telling.
The chairman of the Federal Reserve wants stock prices higher because that might be his only shot at making QE2 a success.
In fact, the Dow Jones industrial average rose 220 points the day after Bernanke spoke, even though the actual announcement of QE2 last Tuesday caused almost no excitement on Wall Street.
What could go wrong?
Well, lots of things.
Ironically, the Fed is looking particularly desperate at an odd time. When it announced QE2 last week the Central Bank said economic growth was “disappointingly slow.”
Yet retail sales seem to have improved recently, led by sales of luxury goods, to be sure, but also including for more common purchases like those at McDonald’s, which reported yesterday same-store sales increased a better-than-expected 6.5 percent in October.
The latest numbers on car purchases are also up nicely. Chrysler’s third-quarter sales improved 20 percent from the year ago period, according to Autodata Corp., an auto sector research firm. And while real estate is still the dregs, at least there has been no recent disasters.
This odd mix of a desperate Fed and sudden hints of growth is causing infla tion expectations to rise. And it could easily cause interest rates to climb as well.
Commodity prices are already soaring. For eign trading partners are irate. And Americans themselves are so angry they fired an unprecedented number of their elected officials last week.
And none of that, in the long run, is good for stocks.
So, as I’ve said before, if you want the excitement and profits that come with speculating in the stock market you better stay close to your computer screen and phone.
You may have to get out in a hurry. jcrudele@nypost.com