How $30 Trillion Disappears…
Stocks went up on Tuesday and Wednesday – a total gain of 207 points for the Dow. Futures markets are predicting another up day today.
But the economy continues to sink. The longest expansion in U.S. history seems to be approaching its end. Here’s CNBC:
Another key indicator is the decline in bond yields (yields decline as demand drives bond prices higher). Economist Richard Duncan explains:
Why, then, would investors buy stocks now? A recession will cut into sales and profits. Stocks should be worth less, not more.
Give a Man a Fish
But Wall Street and Main Street haven’t seen eye to eye for a long time. Now, they practically no longer talk to each other.
Remember the old saying: Give a man a fish and he’ll eat for a day. But give him a fishing rod and he’ll have food forever.
That is the difference between earnings and capital. The rod is a capital asset. With it, you can catch not just one fish, one time… but many fish, over a long period of time. Naturally, a rod is worth more than a fish. But its value goes down sharply when the fish disappear.
Taking the economy as a whole, we measure the rods (capital assets) by net household wealth. The fish are, very roughly, GDP.
Normally, household net assets are worth about 3.8 times GDP. This is not an arbitrary figure. It’s the natural relationship between rods and fish.
That was the ratio that prevailed in the U.S. from the end of World War II all the way up to about 1995. The Main Street economy grew. And Wall Street assets grew along with it. The ratio remained about the same.
But then, fake money and the Fed’s EZ money policies began to work their mischief. First, the ratio of household net worth to GDP went up to 4.5 in 1999, then to 4.8 in 2007… and now, it’s at 5.35.
“Financialization” it is called. It’s what happens when fish and rod part company. And now, pushing them further apart is the slimiest Fed the nation has ever seen.
Taking Away the Punchbowl
In the Eisenhower era, then-Fed head William McChesney Martin saw his job as being to prevent bankers and speculators from doing anything too dumb. He “took the punchbowl away” when the party started to get out of control.
Later, when the politicians did something dumb, spending more than they could afford on the War on Poverty at home and the War on Vietnam abroad, another Fed chief, Paul Volcker, took the punchbowl away again – putting interest rates up to 20% to stifle inflation.
Alan Greenspan brought the punchbowl back. He filled it with hard liquor in the heat of a crisis – first, in the Crash of 1987, and later, after the dotcom blowup of 2000. (He also let investors know that he had plenty more booze where that came from.)
His successor, Ben Bernanke, responded to the debt crisis of 2008-2009 more absurdly – with even more debt… a bigger bowl and far more alcohol. But even he was reacting to a perceived crisis.
And now, with no crisis in sight… with full employment and inflation almost right on the 2% target… the Fed has made it known that it will never, ever take the punchbowl away again.
That is, it is no longer going to even pretend to act as a responsible guardian of the nation’s money system.
Nor will it make any effort to pop bubbles… or to prevent politicians, bankers, and speculators from doing dumb things. On the contrary, it will goad them on with free money!
The present federal funds rate – the rate at which member banks lend to each other – is only 0.18 percent over the inflation rate. The first rate cut, widely expected before the end of the year, will push the rate into negative territory again, where it spent most of the last 10 years.
Will that be enough to stop the tidal forces of the business cycle? Will that (perhaps along with an announcement from the White House that the trade war is over) set off another big runup in stocks?
We don’t know. But when the 21st century began, GDP was about $10 trillion (in current U.S. dollars). Then, U.S. households had a net worth that was already way beyond the normal level… but still less than $50 trillion.
Today, total household net worth is about $105 trillion – in stocks, bonds, and real estate. And when the traditional relationship reasserts itself, household net worth will go back to about 3.8 times GDP, or about $75 trillion. That means that about $30 trillion in asset values will go “poof.”
If any of your money is counted in that $30 trillion of fake wealth, we suggest you move it while you still can.
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