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Investors the world over are still
reeling from last Thursday's massive plunge in the US equity markets, in
which the major indices all gave up more than 4 percent. It was the worst day
for the US stock market since December 2008.
None of this should surprise those
conversant with Austrian economics. The "fundamentals" of the
economy have been and remain awful because the government and Federal Reserve
are consistently doing the wrong things. The apparent recovery, fueled by
Bernanke's sheer money creation, has been bogus all along.
Bubble,
Bubble, Bubble
For some reason, people still cling
to the vague hope that — at least if we wait long enough — the
market always goes up, and "buy and hold" is a great strategy.
Let's look at a long-term chart of the S&P 500:
 
Does the above chart really look
like the US stock market is in store for smooth sailing? Just about everyone
except Chicago School economists now recognizes,
after the fact, that the United States obviously went through a tech and
dot-com bubble in the late 1990s and then a housing bubble a few years later.
Is it really so difficult to understand that trillions in government budget
deficits over the past few years, coupled with unprecedented inflation by the
central bank, have set the economy up for yet another crash?
To recapitulate my argument from a previous article: Alan Greenspan's
low-interest-rate policy in the wake of the dot-com crash spawned the housing
bubble. Greenspan's Fed didn't actually eliminate the need for a recession,
but instead postponed the crisis and made it fester. When reality hit in
September 2008, Ben Bernanke was in charge of the Fed and implemented his
predecessor's failed approach times ten.
No matter how many pundits and
famous economists declare otherwise, Bernanke did not save the day
with his interventions. He has simply postponed the day of reckoning yet
again, and we can expect the final crisis to be much worse than the mere
collapse of a few major investment banks. (The short documentary Overdose
makes the case in a chilling fashion.)
Ben Bernanke
Engineered the "Recovery," All Right
In a perverse way, the pundits are
correct in crediting Ben Bernanke's extraordinary programs for
"rescuing" the stock market. If we zoom in on the chart of the
S&P 500 and superimpose the monetary base, we can see how closely the two
have moved since the crisis began.
Although the above chart shows a
decent fit, in reality the stock market responded very quickly to changes in
the expectations of Fed expansion. Specifically, the sharp upswing in
the S&P 500 in March 2009 coincided with the announcement of the Fed's full strategy for
(what we now call) QE1, and the market rally in the late summer of 2010 began
as knowledgeable Fed officials made it clearer and clearer that QE2 would
kick in after the fall elections.
"Bernanke did not save the day with
his interventions. He has simply postponed the day of reckoning yet
again."
Of course, those economists who
believe Bernanke is engaging in a tight-money
policy would point to the above as evidence in their favor — the Fed
just needs to print more, because it's worked twice already! But if one
believes that showering trillions of newly created dollars into the financial
sector (with the specific aim of bailing out the very parties who made
reckless loans and investments during the housing bubble) is not
conducive to a healthy recovery, then the booming stock market of the last
few years should have been an ominous sign. Note that this isn't 20/20
hindsight; other Austrians and I have been warning that this
"recovery" has been bogus all along, and that the stock market could collapse at any time.
Inflation
Lifts All Boats
None of the above analysis implies
that investors should dump all equities immediately. It is true that the
prospects for real economic growth are terrible — especially in the
Western countries — over the next decade, because of increased
regulations and swollen government debt loads. But at the same time, various
central banks, especially the Federal Reserve, have been all too willing to
create new money as an apparent solution to every crisis. (A case in point
was the absurd proposal for the Treasury to issue
two trillion-dollar platinum coins to evade the statutory debt ceiling.)
In this environment, someone
relying on fixed-income investments (such as private annuities or, heaven
forbid, government retirement checks) could be wiped out by massive price
inflation. As awful as the US real-estate and stock markets might be in the short
and medium run, holding a portion of one's wealth in assets not
denominated in fiat currency may turn out to be a very wise defensive move.
(The problem with shooting the moon on precious metals is that for all we
know the dollar will crash next year and Obama will make it illegal to buy
and sell gold.)
Conclusion
"The only thing we can really be
sure of is that the government will use each new crisis to justify further
extensions of its power."
The US economy still needs to
recover from the festering malinvestments that
accumulated during the previous two booms. By pushing interest rates down to
zero and bailing out the very people who made such bad financial decisions in
the first place, the Fed and Treasury are doing everything they can to
exacerbate the problem.
In this volatile world economy,
investors can expect continued volatility in the stock market. The only thing
we can really be sure of is that the government will use each new crisis to
justify further extensions of its power. At some point the feds will probably
seize the highly volatile 401(k)s and other
stock-market holdings from citizens and replace them with "safe"
government annuities.
Knowledge of Austrian economics
doesn't render someone an expert investor, but it certainly gives advance
warning of the major trends in the economy. Those investors who rely on the
Keynesians featured at CNBC think that another stimulus package or QE3 might
do the trick.
Robert P. Murphy
Essay originally
published at Mises.org
here. With permission
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