This trash is so incoherent I felt the need to work it over:
WASHINGTON (CBS.MW) -- They say the Federal Reserve is targeting the effervescent stock market with the six interest rate hikes the Fed has ordered in the past 11 months, but the market has rallied every time it has acted.
FED never targets the stock market. What good is it to target a result? Kill the messenger so the the bad news doesn't arrive. FED isn't dumb in that way but people who think they understand the Fed system are illiterate.
Counterintuitive reaction
Why would stocks rally when the Fed raises rates? It's probably just unbridled optimism. Each time the rates go up, the market naturally assumes it will be the last move. Eventually, of course, it will be the last hike.
Oh, is that what X believes Y will believe?
But in the meantime, the higher interest rates do their work, quietly eroding market sentiment.
Wrong. FED undermines what rates would do. It is the undermining which sends the market up. The players know the FED hasn't been tight. Why does this nut think the announcement of rate hikes has anything to do with sentiment. Sentiment is hostage to price and only price.
Whether the Fed is directly targeting the stock market or not, higher interest rates should translate into lower stock prices or at least slower gains.
Whether the moon is made of green cheese or not, the cow should be able to jump over it.
Slower economic growth means lower profits.
How do rapidly growing companies after reaching profitability often find themselves drowning in a sea of red ink, if growth means higher profits?
Higher interest rates increase the cost of raising capital, reducing returns.
He forgot the critical word, "borrowed", in front of "capital".
And higher interest rates make lots of other less-risky investments -- like bonds or money-market accounts -- look more attractive.
Really? Rising rates are murder on bond principal if you go out more than several weeks in maturity. MMFs don't look better. They just look safer, but what good is holding cash unless you hold it for the intent of investing it?
It's plain that the Fed thinks the stock market has been too high.
No it isn't.
But it's not that the central bank worries about investors losing their shirts in an inevitable crash, it's because all that wealth is creating real demand for real goods and services that can't easily be met by U.S. firms.
He is saying FED targets the stock market because extra wealth from stocks causes excess final demand. This is the quintessence of the tail wagging the dog theory which is demonstrated in Econ 101 to be elementarily false.
It's called the wealth effect.
This mistaken notion about the "wealth effect" seems to be moving around these days and it's wrong. The wealth effect is a psychological state where consumer confidence is high so that people are indifferent to price increases. That is, the change in marginal demand relative to price is elastic. If they raise prices, I don't care, I'm wealthy, and so I'll buy anyway (even though my source of wealth is in a crashing stock market).
People can spend out of their current income, they can borrow against future income or they can spend some of the wealth they've accumulated. Economists figure that for every $1 in wealth that people gain, they spend 3 or 4 cents.
So he doesn't agree with himself. The 3 cent tail doesn't wag the dog.
If the new wealth they have is grounded in real productive assets, then the economy will have enough extra capacity to supply that extra 3 or 4 cents of demand.
This is incoherent. He is confused between Wall Street and MAin Street. It's an often committed error.
But if the extra wealth is only a figment of speculative imagination, then the economy won't be able to meet the demand.
Well, is the figment of imagination going in to rev up the economy or isn't it?
Economics 101 tells us that when demand exceeds supply, prices rise.
No, it does not. He hasn't taken Econ 101. Total supply can exceed total demand and prices can rise. Price is determined at the margin. In the beginning phase of a stock market advance, demand exceeds supply but prices fall. Demand must do quite a lot of work before the elastic state becomes stable enough so that price can on-balance advance.
Juggling act
When the price of everything rises, then the Fed has failed in its mission to control inflation.
When the price of everything rises there is no inflation so FED hasn't failed in such a hypothetical situation.
Paper wealth has other drawbacks. It can be spent just like money on acquiring other companies or bidding up the price of homes in areas where big shareholders want to live, like Silicon Valley or Greenwich, Conn. Overvalued stocks don't just cause inflation, they are inflation.
This is a major mistake in economics and will get you a D- in Econ 101. The claim that "paper wealth can be spent like money" shows this person has no clue about what money is.
The Fed has another goal: economic growth and stability. If a speculative bubble were to burst, the ensuing collapse could induce the Fed to ease rates and flood the financial system with cash to prevent systemic failures.
Most of the illiterati subscribe to this notion, but the fact is that it is FED which constantly floods the system with cash and creates an environment that drives interest rates upward. I guess he doesn't subscribe to the notion that the supply of something drives down its price after all. Extra cash drives down cash's extra buying power.
It's possible that the crash of 1987 may have helped cause the 1990 recession.
No, it isn't. The stock market repaired the damage before 1990. 1990 wasn't a recession year. 1991 was. It was caused by various factors including oil price, Gulf War, collapse of real estate, FED.
The Fed had been tightening policy throughout 1987 in response to a pickup in inflation, raising the Federal funds rate to 7.31 percent.
The stock market didn't crash because of rates or dollar or any of the other reasons trotted out by the educated elite who have studied much film news to reach these conclusions. It was caused by a synthetic factor: the computerization and the allowance by fool authority for the computers to rule the operations of the NYSE.
But when the market tanked in October 1987, the Fed eased rates down to 6.5 percent within four months. Once the crisis had eased, the Fed resumed its rate hikes, driving the Fed funds rate to 9.81 percent in May 1989 before realizing it had gone too far.
This is pure nonsense. But if it's true then FED is reliably making errors like the one AG made Oct '98. So why are these fools in charge of interest rate policy? Why are they better than the market? They claim they follow the market. That can't be true because how can you follow and fix at the same time? That's pure hypocrisy.
A year later, the nation was in recession. The Fed chairman who oversaw that disaster was Alan Greenspan. Think he wants to avoid it happening again?
That isn't the question to ask. The question is if they can only ,make a continuing collection of mistakes, then why in hell is this ridiculous system retained? It refutes the free market's function. It is retained because FED officials like government officials can't trust people. They know people are inferior and need to be handled like cattle. The result of this attitude is the people act like cattle. These are august men of great wisdom, yet that's a complete fraud. They only look the part, but what do you expect from a society which only prizes the surface? |
