News & Analysis
Is Monetary Stimulation a Sensible Economic Policy?
What Saved the Dow? Sensible Economic Policies ... As of the closing bell on Tuesday, the Dow was trading at 14,254—well above the previous all-time peak of 14,198, which the market reached on October 11, 2007. With investors increasingly optimistic about the economy, nearly four hundred issues on the New York Stock Exchange hit new highs. Sticklers will point out that, after accounting for inflation, stock prices are still more than ten per cent below their previous peak, but that's quibbling. Any way you look at it, during the past four years the market has made a remarkable recovery from the post-Lehman crash.- New Yorker
Dominant Social Theme: If not for monetary debasement, the stock market would have foundered.
Free-Market Analysis: This New Yorker article offers us tribute to monetary policy. But certainly there must be a question about manipulating stock averages up using increased money flows. The article ends by challenging free-market types to "acknowledge the success" of politics and the financial system generally in rebounding from the financial crisis and posting such stellar numbers.
Well ... as free-market types, we are perfectly willing to throw in a word of caution when it comes to where the market has been and where it is headed – Dow Jones, Nasdaq and similar US markets anyway. It seems to us that valuations of industry have increased validity when they are subject to investor sentiment rather than Federal Reserve monetary inflation.
In fact, the question becomes – as this article does not seem to notice – whether inflated averages are viable or ephemeral: That is, are they a valid indicator of performance or merely evidence of the power of the printing press. Here's more from the article:
... Take a quick historical quiz. How long do you think it took the market to regain its high after the stock-market crash of 1929? Five years? Ten years? Fifteen years? Twenty years? Keep going. On September 3, 1929, the Dow closed at 381.17, a level it didn't see again until November 23, 1954. That's twenty-five years, two months, and twenty days—more than a quarter of a century. The stock market's recuperation from the Great Depression took almost five times as long as its recovery from the Great Recession.
No big surprise there, you might say. September, 1929, marked the peak of a stock-market bubble, and the Great Depression was a lot more serious than the Great Recession. In the early nineteen-thirties, the unemployment rate reached about thirty per cent, there was widespread hunger, and some serious thinkers believed capitalism was imploding. By the summer of 1932, the stock market had fallen by almost ninety per cent.
Whilst that's all undeniable, nobody should understate the transformation in sentiment over the past forty-eight months. On March 2, 2009, six weeks after President Obama took office, the Dow closed at 6,626.90. In the six months after the collapse of Lehman Brothers, it had fallen more than four thousand points. Compared to its October, 2007, peak, the market was down about fifty-four per cent—the biggest decline it had suffered since the Second World War. Between 1973 and 1975, the Dow dropped forty-five per cent. In October, 1987, it tumbled by a third. But this fall was deeper than either of those.
If, in early March of 2009, you had said the market would rebound to a new high within four years, few would have believed you. With consumers and employers panicking over the ongoing financial crisis, the Gross Domestic Product was falling at an alarming rate, and the economy was shedding more than seven hundred thousand jobs a month. On Wall Street, analysts and investors had roundly booed the initial effort by Tim Geithner, the new Treasury Secretary, to explain how he intended to end the panic.
At the risk of beating a dead horse, and enraging some devotees of Andrew Mellon's approach to economics, it's perhaps worth remembering what turned things around: activist government policies. A combination of government bailouts (which originated in the Bush Administration), emergency-lending programs from the Fed, and bank stress tests organized by the Fed and the Treasury Department stabilized the financial system. The Obama Administration's stimulus program put a floor under the economy at large. And cheap money—a result of the Fed's ongoing efforts to flood the financial system with cash and keep interest rates ultra-low—eventually led to a recovery in stock prices and housing prices, which was what Ben Bernanke and his colleagues wanted to see. In the nineteen-thirties, the initial policy response was very misguided. With Mellon at the Treasury, there were virtually no stimulus programs; meanwhile the Federal Reserve stood by and allowed many banks to collapse. As a result of this inaction, the economy spiraled downward until F.D.R. entered the White House.
This is a standard Keynesian analysis of monetary history. The trouble is that it doesn't go back far enough. It is well known by this time that the newly minted Federal Reserve of the 1920s created the bubble of the Roaring Twenties by printing too many dollars. The reasons for this are somewhat unclear – and may be either malicious or malign, or a combination of both – but the result is not. The Roaring Twenties gave way to the Great Depression of the 1930s.
The article implies that it was activist polices of FDR and now the Obama administration that "saved" their respective financial systems. But the current central banking system is the cause of the problem as well as the solution.
To use a trite metaphor, when the yo-yo going up and down is making you dizzy, put down the yo-yo. The incessant expansion and contraction of the economy based on constant over-printing of money is not healthy for society and is destructive to savings.
For this reason it is doubtful that free-market types will happily endorse the Dow's current higher highs. Every tick upwards makes it more difficult to ascertain what is the result of industrial value and what is the result of monetary policy.
This leads to a further distortion that has to do with how people invest. If investors perceive – as indeed they must – that the market is being unduly influenced by outside forces, then this can lead to a kind of casino mentality where those involved invest for the short term based on external circumstances rather than fundamentals.
If markets are supposed to be a store of value, and are to be treated as such, then less stimulation rather than more ought to be a considered policy. How can policymakers rail against the casino-mentality of larger investors while manipulating the market regularly via central banking super dollars?
Conclusion: It's a contradiction that must be addressed via sounder – or at least more sensible – monetary approaches.
Posted by victorbarney on 03/09/13 12:42 PM
Vic's Conclusion: It's a contradiction that must be addressed via sounder - or at least more sensible - monetary approaches, which simply IS NOT EVER GOING TO HAPPEN! Just saying, but "we, the gatherer's" in America demand economic failure! You figure?
Posted by taxesbyanyothername on 03/07/13 11:29 PM
The fed is "investing" 45 billion in real estate every month. Yet it has harely budged. other money must be fleeing real estate. Regulation etc. has made hiring way to expensive for most businesses, expecially with expectations as they are. People and businesses are not investing in production directly. Gold is down, so obviously there is not much money going into it. The only big things left are stocks and bonds. Bonds are paying less than inflation, not everyone is foolish enough to want to loose money, however steadily. In the long run they are right. Monetary debasement, and the untenable situation it has put us in, along with stupid laws, and gullible people, have pumped up the stockmarket. Selling GM stock certainly isn't pumping up the market. Of course, hiring Morgan and Citi to do so is like interupting a bank robbery, to hire the robber as the new armoured car driver.
Posted by taxesbyanyothername on 03/07/13 10:44 PM
Your quotes are pretty standard fare around here, though usually not in such profusion. The people at The DB well understand that central banks have no solutions, but are rather the main problem, and that fixing any of the others without doing away with central banks, would, at best, make the situation seem better temporarily. Most of their readers do as well. So, you're a little behind, not unusual for a newby. Maybe you'll catch up.
Expecting "pundits" to have any solutions is a bit dim. That is actually an extremely nice way of saying what I am thinking. Perhaps a little (one heck of alot of) research might be in order, before you demand solutions.
Posted by seer on 03/07/13 11:34 AM
The current economic system is BASED on Debt Expansion and Money Expansion, without out Both the system implodes. Austerity and deflation will be avoided if possible. Helicopter Ben speaks the truth in regards to this system. One certainly does not have to agree with system and I certainly do not agree with it. However there are many holes in the system advocated by Mises and I have yet to see any specific plans as to how the current Corporatocracy could morph into that game Mises advocates.
Posted by David_Robertson on 03/07/13 09:04 AM
I recall Ben Bernanke saying some years ago that the the most important variable the Fed keep an eye on is investor and consumer confidence. He went on to say that it was vital to take actions that would create a perception of economic buoyancy in order to maintain and support investor and consumer confidence.
In other words they are simply confidence tricksters. What does that say about the American media and the American public? (Of course the same is true of the gang in charge at the Bank of England.)
Posted by moneylender on 03/07/13 02:37 AM
If you delete this give me a Click to view linkcond time around.Does the truth hurts.?
Banking is a criminal enterprise,running a Ponzi scheme, where money is created out of NOTHING as a compound interest bearing debt, thus ENSLAVING us all from cradle to grave.
Get your heads around the following quotes
"The bank hath benefit of interest on all moneys which it creates out of nothing."
William Paterson, founder of the Bank of England in 1694, then a privately owned bank.
"Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
"If you want to remain the slaves of the bankers and pay for the costs of your own slavery, let them continue to create money and control the nation's credit."
- Sir Josiah Stamp (1880-1941)
"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).
"I believe that banking institutions are more dangerous to our liberties than standing armies." Thomas Jefferson, US President 1801-9.
The derivative obligations are to the tune of $1.5Quadrillion, the Global GDP is only $60Trillion.
Wake up all of you.Mark Carney like every other Central Bankers are incapable of a solution.
What is the solution.DB.? You are the Pundits
Posted by Don from the Republic of Lakotah on 03/06/13 02:47 PM
Re: billionaires bailing out
Did the FOMC pump the market to bailout billionaires? tO enable Buffett, Soros, Paulson, et al to dump their large holdings?
Posted by daddy warbucks on 03/06/13 01:04 PM
October 9, 2007 the DOW closed at 14164 - gold $737 per ounce
... six years later:
March 6, 2013 the DOW is +/- 14,284 - gold +/- $1,570 per ounce
Dow is at an all time high and the 'experts' are saying the big money is bailing out of US stocks and gold is bottoming and about to trend up.
Reply from The Daily Bell
Thanks, puts it in a bit more perspective.
Posted by bionic mosquito on 03/06/13 10:52 AM
NY: If, in early March of 2009, you had said the market would rebound to a new high within four years, few would have believed you.
BM: Obama did, on March 3, 2009: '"What you're now seeing is … profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," the president said on a day that trading continued to hover under 7,000.'
Click to view link
If this isn't enough to convince one of the manipulation of markets by central planners…what does Obama know about markets? What is a 'profit and earning' ratio?
DB: Every tick upwards makes it more difficult to ascertain what is the result of industrial value and what is the result of monetary policy.
BM: Valuations are difficult to calculate when money and credit is completely driven by central planners; valuation is rendered almost meaningless when interest rates are at or close to zero.
Reply from The Daily Bell
Posted by 1776 on 03/06/13 10:50 AM
Government spending hurts people Feb 25, 2013
Click to view link
Posted by Don from the Republic of Lakotah on 03/06/13 10:24 AM
The dollar's worthlessness as a store of value makes it worthless as a metric. Using gold as a metric tells the story of a depressed market.
Posted by 1776 on 03/06/13 10:22 AM
ARE YOU READY??? The Last Time The Dow Was Here...
With CNBC now lost for countdown-able targets (though 20,000 is so close), we leave it to none other than Jim Cramer, quoting Stanley Druckenmiller, to sum up where we stand (oh and the following list of remarkable then-and-now macro, micro, and market variables), namely that "we all know it's going to end badly, but in the meantime we can make some money" - ZH translation:"just make sure to sell ahead of everyone else", just like everyone sold ahead of everyone else on October 11th 2007, the last time stocks were here...
•Dow Jones Industrial Average: Then 14164.5; Now 14164.5
•Regular Gas Price: Then $2.75; Now $3.73
•GDP Growth: Then +2.5%; Now +1.6%
•Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
•Americans On Food Stamps: Then 26.9 million; Now 47.69 million
•Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
•US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
•US Deficit (LTM): Then $97 billion; Now $975.6 billion
•Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
•US Household Debt: Then $13.5 trillion; Now 12.87 trillion
•Labor Force Particpation Rate: Then 65.8%; Now 63.6%
•Consumer Confidence: Then 99.5; Now 69.6
•S&P Rating of the US: Then AAA; Now AA+
•VIX: Then 17.5%; Now 14%
•10 Year Treasury Yield: Then 4.64%; Now 1.89%
•USDJPY: Then 117; Now 93
•EURUSD: Then 1.4145; Now 1.3050
•Gold: Then $748; Now $1583
•NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545
YEP, AND THEY SAY THINGS AE LOOKING UP
Click to view link
The Inflation chart you will not see or hear about in our government run media!
Jan. 17 (Bloomberg) -- In today's "Single Best Chart," Bloomberg's Scarlet Fu displays how inflation has increased in the 100 years since the creation of the Federal Reserve. She speaks on Bloomberg Television's "Bloomberg Surveillance."
Click to view link
Posted by Danny B on 03/06/13 10:18 AM
Manufacturing is the primary value-added enterprise, NOT banking. Manufacturing declined precipitously. Aggregate income declined precipitously. Loss of American purchasing power was papered over by longer and longer credit terms. There has been a huge decline in American consumption power. Consumer consumption drives (past tense) about 70% of the economy. This huge decline in consumption power should have a corresponding effect on manufacturing volume.
NOPE, that couldn't be allowed. Manufacturing power was pumped up by GOV spending. The stock market was pumped up by GOV printing.
Domestic income fell by a half trillion dollars just in January. Employment and aggregate wages are crashing. It remains to be seen just how long GOV can insulate the stock market from main street.