I'm From The Federal Reserve And I'm Here To Help You
When the government gets involved in the economy, it's political. Political in the sense that the policies effected of necessity provide disproportionate benefits to some members of the body politic relative to others. So, very appropriately, the country's tax policy and economic expenditures are the subject of significant national attention and debate. Such debate invariably rejects policies which can be shown to provide significantly greater economic value to wealthy constituents.
Next week the Federal Reserve will almost certainly cut interest rates for the 11th time this year. While the impact of these cuts on the economy remain quite questionable, the impact on the value of stocks is very clear. In her article, "Market Place: A Rebound In Search Of A Reason" (November 20, 2001), Gretchen Morgenson points out that it is difficult if not impossible to explain the significant increases in stock prices in terms of even the most optimistic opinions concerning the prospects for the improvement in the economy.
The explanation is rather simple. The real economy has limits on the amount of stimulus it can absorb. Stock prices do not have any such limits. Rapid changes in the growth of the money supply invariably result in a disproportionate, economically unjustified, increase in stock prices.
Increases in stock prices benefit the very wealthy far in excess than they do everyone else. The Federal Reserve has followed, and continues to follow, an economic policy of stimulating the economy through a program that provides benefits to the very wealthy. In fact, the redistribution of wealth that has resulted from this policy makes the supply-side policies of the early Reagan years look like populist programs.
Perhaps the best way to stimulate the economy is through such programs. Although it is hard to look at the economic programs this country has adopted as a result of the normal process of review and debate and conclude that we, as a country, think so.
Most of us own stock and most of us pay taxes. Most of us would prefer that taxes go down and stock prices go up. It is interesting that while we seem to understand that not all tax cuts are equal, fair, or good for us individually, we still do not have that understanding with regard to government programs which increase stock prices. |
