Spending Data Exposes Futility of Money Printing

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Spending increased by 0.8% in February, the most in seven months, but incomes only increased by 0.2%. More importantly, real disposable income declined by 0.1%, the third such decrease in the last four months.

As a consequence, the savings rate fell out of bed to 3.7% from 4.3%, the lowest level since August 2009. Therefore, the small rebound in manufacturing and huge increase in spending by the consumer is ersatz and unsustainable. The problem is that consumer debt has now started to increase once again at a time when it desperately needs to contract.

The Europeans have taken a small step toward addressing their problems. They are trying desperately to embrace fiscal austerity, but in the meantime have also been dealt a huge dose of monetary madness from the European Central Bank.

Taking only a halfhearted dose of the appropriate medicine for your economy won't fix the problem. For evidence, look at the Eurozone manufacturing purchasing managers' index. It fell to 47.7 in March, declining in Spain, France and even Germany.

Perhaps most troubling was hat the unemployment rate in the Eurozone rose in February to 10.8%, the highest level in nearly 15 years. However, household inflation in the Eurozone was 2.6% in March, well above the ECB's 2% target rate. By only addressing their fiscal imbalances Europeans will have to battle a recession that is also accompanied by inflation, instead of enjoying the ameliorating effect provided through falling prices.

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In contrast to Europe, the U.S. hasn't gone one inch toward fixing the crumbling foundation of our fiscal imbalances. For example, the Treasury Department said the deficit in March totaled $198.2 billion, an all-time record for that month. That left the amount of red ink through just the first half of 2012 at $779 billion! The Congressional Budget Office forecasts a deficit of $1.17 trillion for the entire 2012 fiscal year, which began Oct. 1.

Both the Fed and ECB still cling to the belief that borrowing and printing money is the best path to prosperity. What Messrs. Ben Bernanke and Mario Draghi don't know, or refuse to acknowledge, is that this is a balance sheet recession in America and Europe. Therefore, creating copious amounts of new money will not increase productivity or grow the labor force. It will, however, continue to provide a tremendous headwind to the economy due to rising inflation.

Interest Rates

Interest rates have been at rock bottom for the last three years. They were taken to zero percent by printing money (inflation) and not by a superfluous amount of savings evident in the economy. Therefore, these low rates have both a moderately positive and extremely negative effect for GDP.

Low interest rates do provide some temporary relief on debt service payments. That's great for heavily debt-laden consumers and our government . . . at least while they last. However, those same artificial low rates punish savers while destroying the purchasing power of the dollar.

Since interest rates are already at near zero, there will not be any further relief on debt service from continuing to print money. There will instead be a pernicious increase in the level of inflation and rate of dollar destruction. But that doesn't deter the stewards of our currency from threatening to provide an endless amount of money printing.

The Fed's next meeting will be in June. Traders are anxiously waiting for more QE, while the economy braces for yet more stagflation. If Bernanke takes a pass next month on further QE, commodity prices and the stock market will hopefully undergo a healthy pullback.

However, if the Fed prepares to launch another round of quantitative counterfeiting, the gold market will take off like a rocket, while the economy sinks further into the stagflation abyss.