Today marks a day of great triumph for all fraudsters, front-runners, cheaters, pimps, drug dealers, central planners, and central bankers in the world. The Dow Jones Industrials has finally made a new high. The massive, multi-year pump and dump scheme of US Fed Chairman Ben Bernanke has finally succeeded in re-inflating stocks back to their 2007 levels.
Well played, you beautiful, bearded public face of a private banking cartel that’s busy making itself rich at the expense of ordinary savers and investors.
In other news, an index tracking economic optimism in the US fell to its lowest-level in 15 months. The IBD/TIPP Economic Optimism Index fell 5.1% in the latest reading. It happens to come at the same time that January personal income in the US sank by 3.6%, the most in twenty years. And now New York City – the spiritual home of the Fed and the banking interests that run it – is showing the largest jump in homelessness in America.
‘New York is facing a homeless crisis worse than any time since the Great Depression,’ says Mary Brosnahan, president of the Coalition for the Homeless, in today’s Wall Street Journal. More than 50,000 New Yorkers spend each night in one of the city’s homeless shelters. Thanks to the housing bust and financial crisis, families are the largest growing demographic within the shelters.
It’s a nice contrast isn’t it? The Dow Jones Industrials sets a new all-time closing high of 14,253. Traders rejoice. Meanwhile, personal incomes fall, optimism plummets, and the homeless shelters of New York are filled with people who don’t benefit at all from a reflation in financial asset prices. How did the Federal Reserve get it so right for its financial friends and so wrong for everyone else?
Well, the Fed doesn’t exist to help ‘everyone else.’ But in the spirit of open-mindedness, let’s go back and look at the high-minded goals Ben Bernanke outlined in a November 4, 2010 op-ed piece in the Washington Post. This was his most complete articulation of the economic benefits of quantitative easing. He wrote that:
‘Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.’
Over two years later, have all the promised benefits been achieved? Well, the jury is out on whether the US housing market has recovered. Today’s Wall Street Journal reports that the number of foreclosures is finally declining. But the main reason for the decline is that more homeowners are getting bank approval for short sales, where the house is sold for less than the mortgage on it, with the bank taking the loss on the difference.
Does that mean US house prices have finally reached a market clearing price? Well, at the very least, low rates have been a balance sheet reprieve for US banks writing mortgages which they sell for a profit to the Fed through securitisation. But what about the other goals? Has QE delivered?
Lower corporate bond rates have certainly encouraged ‘investment,’ if by ‘investment’ you mean buying stocks because yields on everything else have been crushed. The rally in the Dow is a direct consequence of the Federal Reserve’s slash and burn tactics in the bond market. Mission accomplished!
Have higher stock prices boosted consumer wealth and confidence? Judging by the January income figures and optimism numbers, definitely not. It’s always been a spurious proposition that how people feel about their wealth has anything to do with how wealthy they actually are. And wealth feelings aside, has the promised increase in confidence led to spending, incomes, profits and investment? Definitely not.
In other words, the high on the Dow exposes QE for the giant fraud it’s always been. It’s been a wealth transfer mechanism form start to finish, pumping up stocks for the benefit of Wall Street and allowing banks to unload all their mortgage-backed assets on the Fed. It’s been a first-class exercise in the manipulation of sentiment for speculative gain.
You make people feel richer through rising indexes while robbing them blind through inflation, garbage interest rates, and policies that favour banks over households. For the financial sector, the recovery from the disaster that began in 2007 is nearly complete. The damage to households has only just begun.
You may be wondering why we’re spending so much time and genuine outrage on what is nominally an American policy, an American index, and an American Fed. The reason is that there’s a deeper, more universal point here: the people running the world’s financial and monetary systems are one-third incompetent and two-thirds dishonest.
The central failing of central planners like the Fed is their baseless belief that you can create wealth by making money cheaper. The relationship between the unemployment rate and QE has always been tenuous at best. Now we see it for what it really is: a con job designed to mis-direct attention from the real goal of QE, which has always been about pumping up stock prices and making it cheaper for the government to borrow.
It’s either an error in judgement or a deliberate hoax to believe you can create wealth by manipulating the price of money. Real wealth creation takes ideas, hard work, entrepreneurship and creating something people want. Everything else – the financial kind of wealth creation – is just money shuffling. The Federal Reserve is a bastion of money shuffling. It shuffles really well.
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