This isn’t exactly a full post – more like a postette, or a post, jr., or, if the terms weren’t already taken, a postini or postino. Let’s call it a postito.
I just want to comment briefly on the market’s swoon following Ben Bernanke’s recent press conference. As every commentator has noted, the Fed Chair’s remarks were mainly positive – the economy was gaining strength, albeit slowly and uncertainly. If this growth continued, sayeth Ben, the Fed will cut back on the massive moneyprinting it’s been engaging in. Almost instantly, the markets collapsed.
Among the more amusing comments on this swoon was that of the New York Times, which opined that the markets were simply engaging in a “fit of pique.”(1) So we are to understand that investors were happy to lose hundreds of billions of dollars just to show their irritation with Uncle Ben? One can only hope the editors of the Gray Lady(2) are really not such dolts.
The real issue is quite straightforward. Think back to your misspent youth: the party always got better when they brought out the punchbowl, and it went straight to hell when they took the punchbowl away. In other words, a central banker cannot, for years upon end, manipulate the capital markets upward via massive Quantitative Easing, and then expect to withdraw that easing without the markets going downward. It’s simply a truism. You reap what you sow.
And while we’re on this subject, let me flog the “wealth effect” again. (I flogged it initially in my post of 2/6/13.) As I noted in that earlier post, I don’t believe in the wealth effect, but let’s set that aside. Let’s assume it’s somehow true that if the equity markets go up, people will feel wealthier and spend more and the economy will grow. That’s four assumptions, some of them pretty stretchy, but, ok, let’s assume it works that way.
Now, as Fed manipulation goes away, the markets decline, as we’ve recently observed. If the equity markets go down, people will feel poorer and spend less and the economy will go down, right? If it works in one direction, doesn’t it have to work in the other? You reap what you sow. And if that’s the case, wouldn’t it have been better – far better – not to have taken the round trip at all?
Ah, but what fun would that have been?
(1) June 21, 2013, page 1.
(2) So-called because of the Times’ propensity to publish large amounts of copy and small amounts of graphics. Some of us are old enough to consider it a compliment.
Next up: From Hot Wars to Cold Wars to Currency Wars (honest)
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