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Required Reading

November 4th, 2013 - 8:23 am

Jeffrey Dorfman nicely condenses everything we’ve been talking about for months now concerning the Fed and Wall Street. Here’s a taste:

The Fed’s actions have depressed interest rates to such a low level that the stock market has become the only investment game in town.

The manner in which the stock market indices slide on any hint that the Fed’s easy money policies may be approaching an end show that the Fed is artificially inflating the stock market. Clearly, the stock market’s boost from the Fed is not permanent as the market has made clear it will drop as soon as the Fed turns off the pump.

To the extent that the Fed has a proper role in supporting economic growth, it should be pursuing policies that create actual economic growth: increased production and the associated employment gains. Stock market gains are not economic growth. Surely the Keynesians running the Fed are not boosting the stock market so that the wealth gains of the large investors and banks can trickle down to the rest of the population.

Of course, that’s precisely what the Fed has been doing. It prints the money and then banks and big investors pump up equities in an effort to create a “wealth effect” that will trickle down.

There’s just one problem. Wealth can’t be printed. Wealth must be manufactured, engineered, or dug or harvested out of the ground.

And where are our wealth creators? Sitting on their hands, apparently, as their own President hikes their taxes and makes it more difficult for them to do their thing — while slamming for being greedy.

Now go read the rest of Dorfman’s piece — it’s required.

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All Comments   (3)
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If the Fed actually wanted to foster economic growth it would stop the Quantitative Easing and let interest rates rise....There might be a sharp adjustment in the stock markets, but....Banks and other large investors would look for actual projects to invest in rather than simply playing the stock market.

This statement is why economists have such a bad reputation. Looking at the stock market and Fed QE in isolation, yes, this is true. But he's ignoring the 600 lbs gorilla in the room--the Federal debt. Through its mistakes in Operation Twist, the Fed has put much of the Treasury debt in short-term issues, so not only the current-accounts borrowing needs of the Treasury, but the debt outstanding would have to be refinanced at much higher interest rates if QE were to end.

Congress and the Executive have the Fed on the hook like a catfish. They can wriggle all they want, but the only exit from QE is to monetize the outstanding debt, if not the ongoing deficit. Very few economists that I've read are willing to confront that fact--they struggle to view the debt, deficit, and QE in isolation from each other.

And THAT is why economics was much more useful back when it was called the study of the "political economy".

PS--the hat trick here is that due to the deflationary environment, the Fed could probably get away with monetizing the entire Treasury debt, so long as Congress also eliminated the deficit and acted to reign in regulation at the same time. Destroying the Treasury market would mean restructuring the banking industry and the Fed itself, but we're already making a mockery of the "risk-free" interest rate anyway.
1 year ago
1 year ago Link To Comment
Yeah, I've written on a couple occasions about how an explosion in interest payments is already "baked in" to the current debt, due to short-term borrowing. At some point, the refinancing the existing Treasuries is going to bump up against issuance of new debt -- at the same time the Fed needs to sell off some of its stake to hoover up the excess liquidity its been injecting.

Of course, that day won't come until the economy picks up steam, which will happen...

1 year ago
1 year ago Link To Comment
If we had a competent president, I'd say two years from inauguration, but if it's another progressive, I'll bet on Weimar Republic status.

There's much I didn't like about Mittens, but at least he understands business and financing. It really was what we needed.
1 year ago
1 year ago Link To Comment
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