I’m going to let you in on a running conversation I’m having with a good friend and colleague in which I have taken him to task for equating a 16-thousand Dow with a strong economy under the Obama administration.
I told him that never in our two lifetimes has the Dow Jones Industrial Average been less reflective of the underlying economy than it is right now.
The need to finance huge federal deficits is the reason. To finance the deficit the Federal Reserve is keeping interest rates well below nominal levels. (Read: near zero.)
Massive amounts of money that would nominally serve as equity capital for small business investment or as liquidity on the balance sheets of banks that could be turned around into loans is instead flowing into the stock market.
That’s because rates are so low that there is no other place to put it.
The very predictable result has been a huge polarization of income – unlike any time in our history. That’s what happens when only those who have a critical mass of investable funds get to play while everyone else watches. It’s the clearest example possible of “the rich get richer.”
A comparatively small number have, in fact, gotten “hideously richer” – as my friend put it – while the rest of us have languished. (And the richly ironic little secret is that many of those much-maligned filthy-rich Wall Streeters that Dems love to vilify are, in fact, uber-educated, uber-connected, uber-northeast-liberal dyed-in-the-wool DEMS!)
A monetary policy that keeps interest rates artificially low for the sole purpose of financing massive federal deficits is anything but “carefully applied remedial public policy” as my friend characterized the Obama administration’s policies. It makes it cheap for the federal government to borrow which, among the many problems with huge federal borrowing, crowds out private sector borrowing. That hits small business particularly hard. (If you know a small business owner, ask him if he’s tried to raise or borrow any start-up or expansion capital lately.)
A healthy economy needs that wonderful space between safe earnings on interest-bearing instruments on the one hand and public equity markets tethered to economic fundamentals (rather than skewed monetary policy) on the other. That’s where the money for business start-up and expansion is found.
We don’t have that now, which is what is contributing to a Dow that is making the filthy-rich filthier while savers, retirees and small business owners are all curled up in the fetal position.
My friend, speaking of those that have gotten rich in the market, asked, “Isn’t something supposed to ‘trickle down’ now?” My answer is, so long as the federal government continues to finance large deficits with money conjured out of thin air by the Federal Reserve, the economy will putt-putt along stuck in second gear. Nothing will “trickle down.”
With the resulting slow-growth economy, opportunity is limited, which disproportionately impacts those on the lower rungs of the economic ladder. Thus it’s a particularly bad time to be young, relatively unskilled and relatively inexperienced.
Just ask a recent college grad.