Today the stock market, as measured by the Dow Jones Industrial Average, hit an all-time high of 14,283 (intraday basis; closing at 14,253). A broader measure of stocks, the S&P 500 index, also seems to be doing well as it closed at 1539, nearing its all-time high.
So all is well in Obama’s economy, right? People are confident, great time to invest in stocks, right? Not necessarily.
The economy’s fundamentals remain poor. I believe that the Federal Reserve Bank’s “Quantitative Easing” program, which pumps around $85 billion per month of newly-printed money into the financial markets, causes the stock market to go up irrationally.
People know that America’s economic fundamentals are poor; but if the Fed is pumping so much money into the markets, then the markets are going to do well ‘no matter what’, at least for awhile. Realizing this, people feel a pull to join the party – after all, everyone else is doing it – and that makes markets go up even more.
I don’t see how it can end well. I see it as another market bubble. When the Fed stops QE – and it will have to, eventually – the stock market seems more than likely to crash. Bubbles are terrific fun, while they last. That is the phase we’re in now: the drug-QE-induced euphoria.
Moreover, what’s really going on here is (I believe) a process of inflation. I’ll explain.
“Inflation” is a confusing term, because people have different definitions of it. Some people think – or insist – that it only means consumer price inflation, as measured by the CPI, the government’s Consumer Price Index. And by that measure, we’ve had low inflation.
But, as I’ve discussed before, the CPI understates inflation. The government has jiggered the statistical methods over the years, to make inflation seem low. The government has huge financial incentives to do this: for example, it can give smaller Social Security increases, that way. (Smaller in their real value; their real buying power.)
The average consumer knows the truth: she sees the inflation at the grocery store, the gas pump, a restaurant, the doctor’s office, her kid’s college, etc. Moreover, there are other kinds of inflation that affect people: for example, inflation in asset prices, like housing or stocks (cough).
The definition that I use, is monetary inflation. Inflation happens when the Fed adds to the money supply (prints money). The rest – consumer prices increases and whatever else – is mere consequences, which need time to play out.
As I’ve discussed before, when the Fed prints money, the money goes to the government and the financial markets, first of all. And that is, again, what I believe we’re seeing in today’s stock market: nothing but the euphoric effect of $85 billion per month in new Fed money, hitting the general financial markets.
The important point about money is always, always, What does it buy you? Gas and food are approximately double what they were when Obama took office; 3-4 times what they were ten years ago. Same with gold, and much else that you’d want to buy with your money.
So what if the stock market hits highs, when many (or most) of the things you’d want to buy with your money are up so much more over the last several years, that you are materially worse off than you were 5-10 years ago?
That is what I call inflation: A process of declining living standards, under a currency that is de-valued against assets and/or real goods, because that currency has been (or is being) over-printed.
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