Monty Pelerin / Economic Noise
Current financial markets are especially dangerous as a result of government myth-making. Fiscal and monetary interventions and manipulations have distorted all markets, but especially financial markets.
The flood of liquidity by the Federal Reserve has done little for the economy although has juiced the level of financial asset prices. This effect is not accidental and is part of the myth-making that government has engaged in to convince citizens that economic conditions are improving. The following three factors have been instrumental in raising financial asset prices beyond where they normally would be:
- By manipulating interest rates to absurdly low levels, government has forced investors out the risk curve in order to obtain yield. That policy, known as financial repression, drives stock prices up as money has nowhere else to go.
- The influx of new money is not going into capital goods but into financial assets. Companies engage in large-scale stock buybacks, further driving markets upward. This financial engineering involves borrowing at nearly no cost and retiring outstanding shares of common stock.
- The remainder of excess liquidity has to go somewhere. It is not being spent in ways that Keynesian economists believed it would. Instead, it has gone into financial assets, driving prices up. The preceding bubble saw it flow into real estate, particularly single-family housing. Bubbles always end badly.
The failure of Keynesian economics and the political necessity to hide the hollowed out and failing economy have been twin themes on this website since its inception. This recognition is not unique. It is shared among a small cadre of political and economic observers whose numbers grow as time exposes more of the chicanery.
It is interesting to see how others address these issues, especially when they do so independently and from a different perspective. Ben Hunt does so in a rather sophisticated manner, one which may be too technical and complex for the average reader. He offers a free investing newsletter for those willing to stretch their horizons to what often can be complicated but useful analysis. His latest letter spoke of these two key issues, but in a more subtle approach than my own. Here is the central point of his recent letter:
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