Last
week we learned that the key to a strong economy is not increased production,
lower unemployment, or a sound monetary unit. Rather, economic prosperity
depends on the type of language used by the central bank in its monetary
policy statements. All it took was one word in the Federal Reserve Bank's
press release -- that the Fed would be "patient" in raising
interest rates to normal levels -- and stock markets went wild. The S&P
500 and the Dow Jones Industrial Average had their best gains in years, with
the Dow gaining nearly 800 points from Wednesday to Friday and the S&P
gaining almost 100 points to close within a few points of its all-time high.
Just
think of how many trillions of dollars of financial activity that occurred
solely because of that one new phrase in the Fed's statement. That so much in
our economy hangs on one word uttered by one institution demonstrates not
only that far too much power is given to the Federal Reserve, but also how
unbalanced the American economy really is.
While
the real economy continues to sputter, financial markets reach record highs,
thanks in no small part to the Fed's easy money policies. After six years of
zero interest rates, Wall Street has become addicted to easy money. Even the
slightest mention of tightening monetary policy, and Wall Street reacts like
a heroin addict forced to sober up cold turkey.
While
much of the media paid attention to how long interest rates would remain at
zero, what they largely ignored is that the Fed is, "maintaining its
existing policy of reinvesting principal payments from its holdings of agency
debt and agency mortgage-backed securities in agency mortgage-backed
securities." Look at the Fed's balance sheet and you'll see that it has
purchased $25 billion in mortgage-backed securities since the end of QE3.
Annualized, that is $200 billion a year. That may not be as large as QE2 or
QE3, but quantitative easing, or as the Fed likes to say "accommodative
monetary policy" is far from over.
What
gets lost in all the reporting about stock market numbers, unemployment rate
figures, and other economic data is the understanding that real wealth
results from production of real goods, not from the creation of money out of
thin air. The Fed can rig the numbers for a while by turning the monetary
spigot on full blast, but the reality is that this is only papering over
severe economic problems. Six years after the crisis of 2008, the economy
still has not fully recovered, and in many respects is not much better than
it was at the turn of the century.
Since
2001, the United States has grown by 38 million people and the working-age
population has grown by 23 million people. Yet the economy has only added
eight million jobs. Millions of Americans are still unemployed or
underemployed, living from paycheck to paycheck, and having to rely on food
stamps and other government aid. The Fed's easy money has produced great
profits for Wall Street but it has not helped -- and cannot help -- Main
Street.
An
economy that holds its breath every six weeks, looking to parse every single
word coming out of Fed Chairman Janet Yellen's mouth for indications of
whether to buy or sell, is an economy that is fundamentally unsound. The Fed
needs to stop creating trillions of dollars out of thin air, let Wall Street
take its medicine, and allow the corrections that should have taken place in
2001 and 2008 to liquidate the bad debts and malinvestments that permeate the
economy. Only then will we see a real economic recovery.
