Cause and Effect

I Pity the Fool that Expects QE to Work! Studies show that if you exercise you are healthier. Or do they? While there is a relationship, what is that relationship? If you feel better, you are more active. So is the true relationship between exercise and health that healthy people exercise? These types of studies are not as helpful as one would like.

Stockman, in his book the Great Deformation, points out just such an issue with regard to the Great Depression. Nobel Prize winner Milton Friedman made his reputation on his theory of the Great Depression. The current Fed chairman, Ben Bernanke, was Friedman's acolyte. The theory is that the Great Depression was caused by the Fed letting the money supply drop. But was the Great Depression caused by a dropping money supply, or was the drop in the money supply caused by the Great Depression?

Bernanke, or his probable successor Janet Yeltin, will not allow the money supply to drop. In fact Yeltin, or so the rumors say, is even more of an easy money type than Bernanke. What will she do in 5 years when it becomes clear that Quantitative Easing isn't going to work? This answer to this question is why those that believe in inflation believe in inflation. The cure may be worse than the disease.

As I am guardedly pessimist, I still hope for a trifecta—spending reductions, tax increases, and lots of easy money. I hope I am wrong and this is just a normal recession. We will know in 3 to 7 years.