David Haggith Blog | The Federal Reserve’s Stock-Market Supernova | Talkmarkets
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David Haggith lives in the Pacific Northwest and is the author of DOWNTIME: Why We Fail to Recover from Rinse and Repeat Recession Cycles and publisher of The Great Recession Blog for eight years, ... more

The Federal Reserve’s Stock-Market Supernova

Date: Thursday, April 27, 2017 5:47 PM EDT


By The Conmunity - Pop Culture Geek from Los Angeles, CA, USA [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

During the first several years of the Fed’s “recovery” program, bankers denied that banks were the primary drivers of the stock market bull. Then, a little over a year ago, the Fed’s Richard Fisher confessed what everyone in the alternative financial media already knew — the nation’s central bank was “front-running the stock market” in order to “create a wealth effect.”

It was more of a “special effect” really because it was all show with no deeper economic reality to back it. When the special effect machine turns off, the show is over. What the Fed’s machine did was create over 14 trillion dollars of new money and pump it entirely into stocks and bond.

You would think that would make it clear to everyone why stocks and bonds have simultaneously enjoyed history’s greatest bull run. (But somehow it doesn’t.) How could stocks and bonds do anything but go up with years of money creation being pumped directly into their arteries? That, of course, is exactly why it used to be illegal for banks to invest in stocks. Being the creators of infinite money supply, the Fed can completely (and legally since the Clinton days) rig stock markets, for which the Fed’s euphemism was “wealth effect.”

Wealth Effect Theory seems to follow the same line of reasoning as trickle-down economics. It follows a dictum that says “growth in stock value,” no matter how you fuel it, will cause capital investment, such as the creation of new factories. That, in turn will create high-paying, good-benefit jobs.

This, of course, has been utter nonsense that was rightly described by George H.W. Bush as Voodoo Economic before he became a Reagan convert. Nobody ever built a factory in order to create products where there is no demand, and how can demand go up when the only ones getting all the new money are a small number of investors, while the masses who could create enormous demand haven’t a penny extra to spend? It makes no sense.

The reason that both Wealth Effect Theory and Trickle-Down theory are complete fallacies is that no one ever works for money if they they can just go out and pick it off a tree via a bank-guaranteed gamble in Casino Wall Street. Instead of productive, job-creating, capital investment, all you get is new money chasing after the last round of new money in full knowledge that another new round of new money is coming. Another name for that is a “Ponzi scheme.”

So, whether it is capital-gains tax cuts, or just new money created by a clerk’s fingertips on the keyboard of some computer deep in the shuddered heart of the Fed’s Eccles Building, easy money pursues easy gains. Stocks go up, but earnings do not. Investors get rich, but laborers do not. All the same, laborers have continued slobbering like Pavlov’s dogs as the mere sound of the stock market bell, hoping that another explosion in stock prices due to another round of trickle-down tax cuts will someday drop a few trinkets into their hands, too.

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