Recently by Charles Goyette: War Pig in a Poke
Beneath a photo of Fed Chairman Ben Bernanke, the headline on the Drudge Report Wednesday read "WAITING."
On the expectation that the Fed and European central bankers would do something on the monetary front to address the condition of the economy, the Dow ran up 286 points, its best performance of the year.
What is the market saying?
That the resilience of the American economy depends upon the decisions of a handful of unelected bureaucrats made behind closed doors?
That the value of an ownership stake in American industrial companies will rise depending on the votes of a small group of people few Americans could name?
That our future prosperity is not in our hands, but determined in proverbial smoke-filled rooms?
It may be that no one has smoked cigars in Fed meetings since Paul Volcker, but the power of the Fed to boom and bust the economy with money printing continues. And so the markets, indeed the world economy, await decisions from the Fed and their Eurocratic counterparts.
What is it exactly that the markets think central banks like the Fed can do?
Print more money? The Fed has printed hundreds of billions of dollars to buy the bad assets of the money center banks. It has printed hundreds of billions more to buy the downgraded debt of the U.S. Treasury. It has been great for the banksters and their bonuses, but has done nothing for the U.S. economy.
Print more money to lower interest rates? Interest rates are already at rock bottom now. The yield on 10-year Treasuries has been down to a meager 1.5%. Lower interest rates haven’t restored the economy either. Unemployment continues at depression-era levels.
What are we to believe must have happened to enable the stock market to turn in its best day of the year, especially after the market had fallen throughout the month of May and had just given up a thousand points? Was it the lunar eclipse or the transit of Venus across the face of the Sun that had the American people awaken as one, and decide on Wednesday to buy stocks? No, in fact, the American people did not suddenly change their investment posture at all.
Such market moves aren’t suddenly driven by the phase of the moon, by "animal spirits," or by overnight turns in public confidence. These big, quick turns of the market happen at the hands of Wall Street itself. It is the work of traders and fund managers attempting to read the tea leaves of tomorrow’s action.
Now, here’s the little secret about Wall Street professionals: Some of them, a small minority, may actually understand the economy and monetary matters, and what produces wealth and what does not. Most others, perhaps more than you would want to know, do not.
But they all want to be right about what the markets perceive, about how the markets will react to the latest news. The issue for most is only rarely, and then only as an academic question, whether a new Fed initiative actually contributes to productivity and the wealth of the American people. The incentive of traders and money managers, their very livelihood is tied to anticipating what people will think, right or wrong; will people think the latest news is bullish? Or bearish? The important thing for Wall Street is not whether some initiative is wise or foolish. The important thing is to be on the right side of an ephemeral market move.
Now, whether people think some announcement or new policy is good or bad is largely determined by what they are told. And although it confounds common sense to think that the destruction of the currency, half of every commercial transaction, can be good for commerce, or that the addition of more debt in an economy already being dragged down by debt, can produce prosperity, the analysts, commentariat, and reporters, not having seriously studied the subject, simply propagate the conventional wisdom.
Here, for example, are quotes from the Associated Press account of Wednesday’s market action: "Hope that European officials would find ways to ease the continent’s debt crisis helped launch the rally." And, "A speech by a Federal Reserve official also added to speculation that the Fed may take more steps to bolster the U.S. economic recovery."
And so it is that the belief, that the Federal Reserve is about to dilute the purchasing power of the currency with Quantitative Easing III, which produced the biggest run up in stocks of the year. Elsewhere, I have recounted the reporting for years of new plans being hatched "to finally solve" the European debt crisis. In a pattern that has been repeated over and over, the news has repeatedly run the stock market up hundreds of points. But as anybody can see, there have been no such solutions. The reports have been false; the plans have all failed. And after a big jump on the news, the stock market soon gave back each of the gains it made on the naïve reports.
On Wednesday, the market was awash in talk of another such European solution: The extension of more debt to solve the continent’s debt crisis.
In the meantime, word had it that the Fed was preparing the way for QEIII. No more waiting; the Fed was ready at last to "stimulate" the economy again.
It may have been enough to goose the stock market. But more such stimulation and we will all be undone.
Charles Goyette [send him mail] is the author of the New York Times bestseller The Dollar Meltdown. His new book is Red and Blue and Broke All Over: Restoring America's Free Economy. He is also editor of Freedom & Prosperity Letter, a monthly political and financial newsletter dedicated to revealing the truth about the U.S.’s political scene and economic climate. To learn more, go here.