AUSTRIAN ECONOMICS ADDICT

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FINANCIAL MARKET MINIPULATION

The stock and bond markets were sent soaring last week when Fed chairman Ben Bernanke said more Fed stimulus was needed (read here). Three weeks ago Mr. Bernanke hinted that the Fed might start to taper its money injections and the stock and bond markets had a sell off. In an article I wrote on July 1, titled Incremental Steps To The New Normal, I said, “The sell off in the stock and bond market, the week of June 20th, at a hint by Ben Bernanke that he might ease out of Quantitative Easing in the not too distant or distant future, is evidence that the financial markets are a bubble activity blown up by the Fed’s double edge sword of printing counterfeit money and artificially lowering interest rates. We witnessed more evidence the following week when first Quarter GDP numbers were revised down. This started a rally in the stock market because investors know that if there are bad aggregate numbers, the Fed will keep electronically printing money…” . It’s not difficult to predict how investors will react to economic data, because they understand what the Fed will do in response to this data. The Fed has a discernible policy pattern since before the tech bubble in 2000.

WHAT DRIVES MARKETS, DATA OR DOLLARS?

When bad economic numbers are reported, shouldn’t the markets respond by correcting downward? Not in the new upside down economic world created by the Fed, where bad news is good news and good news is bad news. Financial markets are complicated at the micro level but the macro explanation is easier to understand, lets give it a shot. Financial markets are essentially futures markets and are driven by what investors think the future will be, based on their analysis of how strong the economy is. Economic data are a signal they use to make decisions on the strength of the economy, and where capital should be invested. This data is not a signal of what will go on in the future, it is a picture of what has happened in the not to distant past. This data is economic history reported in numbers, and doesn’t guarantee a future trend. For the most part economic reality is what has driven the financial markets in the past, but this isn’t the case now. Today these financial markets are driven by the electronically printed counterfeit money the Fed injects into them. These injections are actually the Feds attempt to keep economic reality from affecting the financial markets. The Fed thinks it can create a fantasy land where financial markets always go higher. Unfortunately in the real world of scarcity, profits and losses are equally important in allocating scarce resources to their most productive uses. Profits signal where investment should go and losses signal when activities should be stopped.

INSIDERS UNDERSTAND THE FEDS UPSIDE DOWN WORLD

In the Feds new world of artificial abundance, the meaning of these economic signals is completely opposite of what it is in the real world of scarcity. Investors now know how the Feds game is played. They know that the Feds counterfeit money injections are going to find their way into the financial markets, and because of the law of supply and demand, this supply of counterfeit money drives up prices. When bad economic data is reported, they know the Fed will try to counter this economic reality with more counterfeit money injections. It’s really simple to understand, bad economic data means more counterfeit money will be going into the financial markets, and good economic data means the Fed will start thinking about cutting back the counterfeit money.

HIT THE REPLAY BUTTON

Even though many people think printing abundance can go on forever, it will eventually run into the reality of scarcity. Where we are today, is similar to where we were before the tech bubble popped in 2000, and the housing bubble popped in 2007. People thought the tech and housing bubbles, created by the Fed, could go up forever. These bubbles ran into the ceiling of economic reality. We now have a Fed created financial bubble, which is bigger than the previous bubbles combined. People believe that this time, it can go up forever. Economic reality will deal with this bubble like it dealt with the previous bubbles, and unfortunately these people will be hurt the most. The politically and financially connected too big to fail banks and wall street firms will get out before economic reality hits just like they did in the previous bubbles. They will take the money and run while regular people’s investments and retirement accounts will lose their value. This is the same movie we’ve seen twice in the last fourteen years, and the ending won’t change just because we hope it does.

Related Article – We Can’t Recreate The Garden Of Eden, by austrianaddict.com.

Related Article – Keynes Was Correct In 1919! by austrianaddict.com.

This entry was posted on July 15, 2013 at 12:04 am and is filed under Econ. 201. You can subscribe via RSS 2.0 feed to this post's comments.

Tags: Ben Bernanke, Bond market, Counterfeit money, Fed, Financial Bubble, Housing Bubble, Quantitative Easing, Stock market, Tech Bubble