How to heal the economy, Is there proof the stock market growth is driven by the FED, S&P plunges, What the economy needs, Why is the economy fragile, Why is the economy not doing better, Why is the stock marker so volatile
Santelli on CNBC let lose one of has classic rants on the subject of Central Bank magic cash or what he refers to as “pixie dust.” The stock markets of the world have grown fat on incestuous trading schemes motivated by Central bank stimulus. In what could be called “Pixie Dust Fever,” investors have driven stocks ever higher even as the economy has languished. That real growth, as marked by GDP, has been lacking is being ignored just like lack of real demand and the dangers of sub-prime mortgages were ignored during the housing bubble. The tell tale sign of the markets real mover and shaker is the level of correlation they have to the Fed’s balance sheet. Of course, a puffed up market is a fragile market; one that quakes at the slightest ill wind or threats of a stimulus pull back. This was made evident by last weeks market tumble when investors got spooked and started running for cover.
As much as the world wishes it or Keynesian’s claim it, economies can’t be healed by moving around capital or printing money. Like politics, all economics is local. The bakery and the garage both plan according to what they perceive the situation to be. If the local business or even the regional one is worried it translates to lost jobs and lost opportunity. Consumers in turn react to employer angst by hunkering down themselves completing the cycle of despair. Dropping pennies from heaven, which is what the central bank stimulus programs amount to, only alleviates some of the symptoms but the disease remains. Until the source of employer angst is addressed, the underlying economic situation will not improve; all other solutions are futile.
Unfortunately that is not in the cards, politicians are too bent on creating utopias and bankers are just as intent on anesthetizing the subsequent wounds with the equivalent of economic opium. At what point people will wake up and smell the putrid rot oozing just beneath the economies surface is unknown. What is certain is the banks can’t go on infusing magic cash into the markets forever. Sooner or later they will have to stop and let reality come shining through, that is if the underlying economic frailty does not shatter the fantasy first.
The true tragedy is fixing the situation is not that difficult. What is needed is merely the application of simple economic fundamentals. Things like reducing regulatory burdens, removing hurdles and assuring future monetary stability. Unfortunately the present course is to forgo economic fundamentals and substitute them with central bank manipulation and political shell games. A pattern that shows no signs of ending any time soon.
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