Fed Intervention Helps Markets But Not Real Economy

Jan 27 2014, 9:21am CST | by

Stocks are being manipulated to the upside. Willfully. Knowingly. Intentionally.

Janet Yellen can talk about tapering quantitative easing but she can’t do it. The economy needs more support from the Fed, but the Fed doesn’t put more money into ordinary household budgets. You can see that just by looking at jobs, wages, or consumer prices. The U.S. CPI is barely going up at all.

That’s because the Fed’s intervention stays in the financial economy, where the easy money and credit as a result of zero interest rate policies and QE feeds directly into stock, bond and real estate markets. Look at a stock chart, identify the episodes of QE, and you will see that the Fed’s QE equals U.S. stock market gains. Liquidity mainly drives asset prices, not the real economy.

Asset prices do not reflect the genuine “facts on the ground” for businesses or consumers. They are jimmied and jived by the authorities.

Stocks, bonds and real estate have added $21 trillion to the nation’s balance sheets since 2009. But at the rate the economy is adding real wealth, it will take 70 years to catch up with those asset prices. Stocks, bonds, and real estate are all counting on growth that will never happen, or at least it won’t happen soon enough to justify such high prices.

What made stocks go up so much last year was that the Fed made a lot of liquidity available while the federal government used less of it than it had the year before. This left a lot of excess liquidity wandering around looking for a home. What did it find? Stocks and housing.

Without Fed support, the economy would probably be in recession. U.S. GDP went up about $350 billion last year. The Fed offset it with $1.2 trillion worth of QE. Even so, the economy only limps along. Without it, the economy slumps. The Fed can’t tolerate a slump. So, it has to continue with QE.

Meanwhile, the federal government is absorbing $400 billion less capital this year than last as a result of lower budget deficits. This leaves a lot of excess stray kittens in need of adoption. Who will take them in?  Stocks and real estate, of course.

Bill Bonner
for The Daily Reckoning/>

This article originally appeared here, and was prominently featured at The Daily Reckoning.

Source: Forbes Business


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