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‘The Quickest Route To Recession’ (And A Case Of Cognitive Dissonance)
The stock market isn't the economy.
We say that all the time. It's almost a cliché. And, in many respects, it's true. Stocks are overwhelmingly concentrated in the hands of society's richest. The further they run, the faster the perpetual motion machine spins, ballooning the wealth divide and driving an even bigger wedge between Wall Street and Main Street.
In the post-Lehman era, monetary policy (well-intentioned or not) turbocharged things, inflating the value of financial assets, and there
Everyone is leveraged up because fiscal policy has been missing for 20 years. If you want to get rid of the asset ‘bubble’, you need to give people a chance to deleverage. Instead we’re gonna tell them to delever without doing anything to support the lives (i.e., the demand) they’ve built on cheap money.
The worst part is that a majority of congress is going to see this drama as a reason to break out the belt-tightening rhetoric again.
I would argue that this is by design and the desired outcome by the ideology that currently enraptures the Republican Party. Their underlying ethos is a baseline of nihilistic destruction as part establishing (or re-establishing) a highly stratified social caste system.
Everyone gets killed by a stock market crash. Housing crashes also, leaving millions underwater on their mortgages. State and local finances tank, leading to layoffs of public employees, including teachers. It’s true that the Fed encourages these bubbles, but I’d agree that they have little choice at this point but to do everything they can to keep the markets propped up.
I’m looking at Chart 2 and can’t help but believe my lying eyes
In the absence of pensions, workers are having to participate in markets to have a chance at relaxed retirement.
With interest rates perpetually low it is impossible to build wealth by saving. This is the driver for bubble finance. In the last two bubbles housing was a major participant. Housing is the most sought after asset by main street economy participants. I would argue that maybe in the past bubbles like dot com didn’t impact them but going forward I would expect housing to be a player in all bubbles as are vehicles. This means everyone is harmed by bubble finance. Additionally, working class citizens are also harmed by the ancillary layoffs that follow bubbles. Whenever they do deflate cutting jobs and benefits always follows leaving those with underwater homes and cars without income. This actually exacerbates the bubble deflation. With no worker protections and no retirement benefits, the rich keep their assets while the poor try to start over again.
Bubble finance is a known entity. We also know that the are created and destroyed by Fed policy now. In my mind there is no better metric to drive your investment thesis than what the Fed is currently doing. If they are in QE then buy anything, it all goes up. If they are in QT get on the sidelines and wait.
While it’s acknowledged that rich people don’t spend money. They actually do spend some on campaign finance. This has absolutely benefited the Republicans most. It’s why they are in love with any government action that benefits the rich. They are intentionally enabling the wealthy to gain more power in the wealth spectrum because it means more money to invest in campaigning and probably some side money personally.
The economy, including the ‘market’ is a complex system with lots of forces in play. As H points out time and again, the folks who are supposed to analyze it, the economists, still don’t understand how the thing really works. Push on it here, or here, and what happens. No one quite knows for sure.
The Fed has no certainty of how their actions will exactly impact such a complex dynamic – aim, shoot and pray. It should go without saying that if there was a straightforward way for the Fed to ‘fix’ the whole mess they would have done it a long time ago. I’m not sure this is a good analogy, but it occurs to me it’s like a steam ship with a coal boiler. The Fed is the guy who shovels the coal, but doesn’t have control over course, steering, navigation, weather and whatever else might affect the ship.
I can’t shake the idea that the market is the economy, or at least a good proxy. That’s not to say it isn’t a tangled mess. Who owns the market is a separate issue. Market ownership is a straightforward reflection of the unequal distribution of wealth.