Frustrated by the stagnant US economy, and like the character in Monty Python who’s down to one arm left to fight with, The Fed has spitballed out another round of US Debt purchases continuing to hope that somehow the US consumer will re-embrace spending, somehow banks will be encouraged to make new loans and somehow US businesses will resume hiring and capital expansion.  Uh – No.

The Consumer is still reeling from (a) the stock market losses (yes its up this year but still down more than 20% from its 2007 high), the collapse of housing values (no end in sight) and a terrible employment market (that still has a long way to go before we even begin to recover — remember we need 150,000 new jobs per month just to say even).  It’s hunker down time in the American household — debt is bad, savings is good, spending is minimal.  Good long term strategies but terrible if you’re The Fed and our economy is 2/3 dependent on US consumer spending.

US Banks know full well that they have crappy (albiet better) balance sheets, with piles of bad consumer and commercial real estate mortgages — and they’re still trying to figure out how they got in this mess and what they need to do to restore stock prices (and executive bonuses).   As long as the US will loan them money at near 0% — they’re quite content to invest it in other currencies or low risk instruments paying a couple hundred basis points more — while they lay low and wait for the sun to rise another day.  (Plus — they have this whole credit card/debit card consumer interest/transaction charge thing to re-figure out so excess bandwidth is devoted to making up the $$ gap by designing new banking fees, statement fees, etc.)

US businesses — at least those with reasonable balance sheets and semi-strategic management have loaded up on all the debt they can get at these low rates and are doing what The Fed has actually enabled against a soft revenue outlook — buying back shares to lower the cost of capital and buying other companies (as US economic policies of late have made assets cheaper and more desirable than employees).  Cut costs, buy more assets, consolidate your competition, repeat over and over.  With consumer demand low and 28% capacity idleness rational business folks are not going to “Field of Dreams” their platforms (“Ray – if you build it, they will come”).

The Wealth Effect is a giant Rope A Dope — yet another bubble waiting for the inevitable bath.