Ben Bernanke: The Economy and Stock Market Myth
In a recent interview with ABC's Diane Sawyer, Fed Chairman Ben Bernanke, the walking, talking embodiment of systemic risk, proclaimed about the U.S. economy he's done so much to destabilize that "It's far too early to declare victory." Translated, Bernanke stands ready to flood the banks with even more dollars if and when he deems the economic outlook shaky.
What's interesting about Bernanke's ongoing interventions is how even his skeptics - in a passive/aggressive sense - seem to buy into what he's doing. Though they know from simple history that the money printing and devaluation at which Bernanke has become expert comes with a brutal price, they acknowledge - with the Fed Chairman's implicit agreement - that the economy and stock market benefit, at least in the near term, from his tinkering.
It's time to put this mythology to bed.
Considering the broad economy, it's said that easy, devalued money is a short-term accelerant for driving up consumption. The view is that with dollars plentiful and weakening, those holding the dollars buy with abandon, thus boosting growth. Bernanke has channeled that view himself given his own belief that cheap credit, no matter its destination, keeps the economy afloat by keeping the consumer alive. Monetarists and Keynesians, seemingly two sides of the same coin with Bernanke straddling both discredited Schools, accept this presumption.
Of course the problem with this thinking quickly becomes apparent. Indeed, lost in the absurd belief that near-term hardship can be fixed through consumption-driven growth is that there's no production - the real source of consumption - to speak of. Instead, money simply changes hands, spending of cheapened dollars increases, but there's nothing real to point to whereby economy-enhancing production drives the consumption.
Logic tells us production wouldn't increase under the scenario just described given greater realities about capital flows. Central banks don't flood the economy with devalued money in isolation; instead there's a natural reaction to such a move. Specifically the commodities most sensitive to devaluation tend to rise when a central bank pursues ease for the sake of ease, and the result is that investment flows into yesterday's stores of wealth - investors essentially go on strike through the purchase of inflation hedges - and away from truly productive ideas.
Bernanke similarly believes low rates, easy money or both drive up stock prices that are then sold at higher prices; the sale of appreciated shares another accelerant. This sounds convincing if you don't think production matters, but the notion of the "wealth effect" quickly dies of its own illogic. Assuming individual A sells appreciated shares for $50,000 to individual B on the way to a wild spending spree, individual B is out $50,000, thus zeroing out any presumed impact. Just the same, people who should know better argued that borrowing against rising home prices in years past boosted consumption, but much like the stock sale example, for someone to borrow someone else must be saving. There's no increased production under the previously mentioned scenarios, hence no real growth, and no increased consumption.
Money's sole purpose is as a medium of exchange, and also as a measuring stick necessary to put value on investment opportunities. To suggest that the creation of what is merely a ticket can somehow boost growth just for it being created is a highly naïve presumption.
Looking at the stock market, Fed skeptics have argued that the excess creation of dollars has boosted stock prices too; the assumption here that dollars seeking a place to go find their way into the stock market on the way to bidding it up. It's yet another easy theory to throw around, one frequently seen in columns covering the market, but just as absurd as the belief that money creation is a stimulant.
For one, not asked enough is what's been driving the S&P and NASDAQ up in recent months. With the NASDAQ, it must specifically be asked if it would be anywhere near 3,000 absent the presence of Apple. Think about it, and then ask about where the S&P would be minus this giant? Looking at the S&P again, where would it be if we stripped out the energy sector and other extractive industries primed to do best - at least in the near-term - when devaluation from monetary authorities makes commodity companies attractive to investors eager to protect themselves from devaluation.
If that's not enough to convince readers, shouldn't we at least consider what investors are doing when they purchase shares in companies? If so, when investors buy shares they're explicitly buying future dollar income streams of the company in question. If so, under what sober rationale could anyone say that the stock market is aided by central bank attempts to devalue the very dollar earnings that investors are tautologically purchasing when they invest in U.S. stock markets?
If readers still aren't convinced that the Fed can't create a rally with easy money, maybe stock-market history will prove useful. Though we've only got four decades to work with considering the dollar had a gold definition until 1971, the record is pretty clear that periods of easy money correlate with market weakness as opposed to market health. Indeed, the ‘70s and the last 11 years are the two periods since 1971 during which the dollar was/is weak, yet the S&P returned 17% in the ‘70s and is essentially flat since 2000. Conversely, during the ‘80s and ‘90s when the dollar was strong, stocks soared; the S&P up 222% in the ‘80s and 314% in the ‘90s.
In short, while conventional wisdom says the Fed can boost the economy and stock market through simple money creation, empirical evidence and basic logic say otherwise. In the aforementioned interview with Sawyer, Bernanke hubristically communicated to viewers that he stands ready to "boost" the economy with more easy money if he deems it necessary, but the dirty little secret is that Ben's persistent machinations are what stand in the way of the recovery he claims to desire.