Image: Federal Reserve Chairman Ben Bernanke © Manuel Balce Ceneta-AP

Related topics: stocks, Federal Reserve, economy, shorting, Anthony Mirhaydari

Aside from the dramatic killing of Osama Bin Laden, Americans haven't had a lot to be excited about lately.

Just 22% believe the country is on the right track, Rasmussen tells us. According to a new Gallup poll, more than half of us say the economy is in recession or depression, despite the fact that output has been expanding since the summer of 2009. In fact, more of us (29%) say the country is in a depression than say the economy is growing (27%).

There's a good reason for this: As inflation surges at the store and the gas pump, the economy is stalling. And the heart of the problem could very well be the Federal Reserve's $600 billion "QE2" money-printing initiative, which was implemented last November to great fanfare on Wall Street and is set to end in June.

While the program has helped push up the cost of living for all of us -- sending inflation into the red zone and damaging consumer confidence -- evidence suggests its benefits have accrued only to the top tier of the net-worth ladder.

Image: Anthony Mirhaydari

Anthony Mirhaydari

Here's a look at how the Fed went off course -- followed by a few investing ideas to protect yourself from the results.

Cream to the top

Yes, the stock market has posted impressive gains since the idea of QE2 surfaced, with the Standard & Poor's 500 Index ($INX) up nearly 31% from its low last August. And that has pushed up household net worth by $2 trillion. The hope has been that this will translate into new spending and drive the economy forward.

But stock ownership is concentrated among the wealthy: On average, just 12% of households worth $100,000 or less own stocks and mutual fund shares outside their retirement plans -- a group that comprises 74% of the total population. While many more own shares through 401ks and IRAs, they're not in a position to easily tap that wealth for current spending.

At the same time, QE2 has pushed up borrowing costs, pressing down the prices of homes -- a much more widely held asset. The Case-Shiller Home Price Index started falling last summer as the idea of QE2 was floated, and it hasn't stopped since. The broad 20-city index now sits below 2009 levels.

This is a continuation of trends that have been in place since the recession ended in 2009. According to Credit Suisse equity strategist Douglas Cliggott, it suggests the improvement in net worth during the past two and half years "has been heavily skewed towards that relatively small part of the U.S. population that has significant equity holdings."

In other words, the Fed's "stimulus" has made the rich richer, with limited impact in terms of new spending. It's made the vast majority of people poorer, and less able to spend. It's this tradeoff that threatens to snuff out the feeble, three-year-old economic recovery.

Disappointing GDP

Just look at the first-quarter GDP growth numbers released last week. Most people just aren't spending.

The government reported that GDP growth slowed to 1.8% annualized from 3.1% in the fourth quarter -- a dramatic slowdown at a time when both QE2 and the government's payroll tax cut were in full effect. Indeed, Paul Ashworth at Capital Economics was disappointed enough to tell his clients that given all the tailwinds, he had "originally hoped for a lot more."

The drop was due mainly to bad weather, higher energy prices and a decline in consumer spending. The last two of these factors, at least, are set to continue with the budget fight under way and commodity prices still high. Consumption growth slowed to 2.7% from 4% previously -- mainly due to a drop of nearly 50% in spending on goods such as motor vehicles and groceries. Government consumption dropped 5.2%, which whacked 1.1% from overall GDP growth.

Unfortunately, while Fed Chairman Ben Bernanke insisted last week that any negative factors are "transitory," the data suggest otherwise. The Kansas City Fed Manufacturing Composite Index was just the latest regional factory survey to suggest production is slowing. And as I mentioned in my last column, the Citigroup U.S. Economic Surprise Index continues to decline to reflect this slowdown in manufacturing.

All of this hurts the job picture. Weekly jobless claims spiked to 429,000 last week, well above the previous week's 404,000 and the 390,000 that analysts were expecting. Current levels were last seen in January. Not only does this point to trouble in the April job report due out Friday, but it breaks a long downtrend from last summer that suggested economic healing.

A flawed idea from the start

I can't say I'm surprised. Last November, I wrote that QE2 threatened a repeat of the "Great Inflation era" that started in 1964, lasted 20 years and didn't end until inflation was at 15% and interest rates at 22%. In "Hiking inflation won't help, Ben," I wrote:

"It seems strange to have this discussion more than a year after the recession officially ended, after corporate profits have returned to pre-recession peaks, after the economy has created 1.6 million new jobs and after personal income has moved to new highs."