The Contraction of the U.S. Economy - No, it wasn't the Harsh Winter

Trying to predict the market is going to do is like attempting to predict the weather (though meteorologists arguably have a better track record than economists). It doesn't help when the numbers are cooked beyond recognition.

According to some, 2014 was supposed to be the year that the U.S. economy finally pulled shakes off the last remnants of the recession. A boost in new home construction was going to send a ripple of goodness throughout the economy and inflation was going to remain stable.

So far those predictions have not panned out. Rather than growing, the U.S. economy actually contracted 1% in the first quarter, inflation is rising across the board (to such a degree that even mainstream pundits are forced to acknowledge it), wages are stagnant, and a record number of Americans have completely exited the workforce, yet somehow the stock market keeps hitting new highs, and of course a rebound is just around the corner.

The official explanation for the contraction: an unusually harsh winter. This is just a temporary bump in the road. From here on out we're going up, up, up. No one in the mainstream media dares ask the obvious question: might this have something to do with the fact that the Federal Reserve began to taper down QE3 in that same period?

Of course they won't ask that question. The implications of an honest answer would be far too damaging.

Since 2009 the Federal Reserve has engaged in an unprecedented streak of money creation, which they have affectionately dubbed quantitative easing (or QE). QE3, which began in 2012, differed from previous bailouts or stimulus programs in that it had no defined end date. QE3 would continue until the Federal Reserve saw fit. So for the past two years they have injected roughly 85 billion dollars into the banking system every month.

Early this year the Fed announced that they were going to begin 'tapering' down QE3, and at this point they are only pumping around 40 billion dollars into the system each month. Eventually they say this program will be wound down completely, and interest rates will be allowed to rise. Interest rates have been held artificially at around zero since 2008.

The idea that this massive influx of money can be withdrawn, and interest rates normalized without having any effect on the economy is nonsense. That's like saying that you could remove the sun without having any effect on the earth's temperatures. Of course the effects may take a while to show themselves. The amount of sunlight hitting earth peaks in mid June in the northern hemisphere, but temperatures continue to rise well into August across most of the United States. Likewise, money that was printed months ago is still running its course, that's why we're seeing prices rise across the board, and record highs in the stock market. However for the average Joe, this hasn't translated into an improved standard of living.

By the official numbers, unemployment is down, sitting around 6%, however no one likes to mention the fact that the government arrives at this figure only by omitting those who have given up and are no longer looking for a job. As of May, 2014, 92 million working age Americans have completely left the labor force. That's almost 1/3 of the U.S. population, and they are not being counted! Just by itself, this is an astounding figure, but it is completely in line with several other real world indicators. For example, according to a study by Pew research, more than 1 in 3 millennials (people between the age of 18 and 31) are living with their parents, and the USDA estimates that roughly 101 million Americans are currently receiving food assistance from the federal government. Taken as a whole, the message is clear, at least one third of America's population is struggling financially to some degree.

But don't worry, we're in a recovery. Hey just look at the S&P 500.

This disconnect between the performance of the stock market and the reality on the ground has been growing, and the cause should be obvious to any honest observer. QE3 is just a new spin on trickle down economics, and trickle down economics doesn't work.

If you inject billions of dollars into the banking system, it will boost the stock market, but though most mainstream economist consider this and GDP to be the primary measures of economic health, it's not going to help those who actually work for a living. That should be obvious at this point. Furthermore, this disconnect can't continue forever. The stock market may ride a wave of irrational exuberance to a new set of highs for a while (or the Fed may pull back from the taper), but what goes up, must come down. When it does, they'll have a new excuse ready.