Rising Market Likely An Illusion of Money
January 14, 2013, 4:47 p.m. ET
"So weakness equals strength, at least in stocks," you say in your Jan. 5 editorial "Jobs and Money." Yes, quantitative easing 1, 2, 3 and 4 devalue the dollar and therefore drive stock and commodity prices upward. But what does this tell us?
Price is the great communicator. It signals the balance between supply and demand and therefore modulates production and consumption. Yet when the value of the dollar is deliberately manipulated, dollar prices cannot communicate this balance, making it difficult for producers and consumers to align production and consumption.
Stock prices rise today not necessarily because the underlying companies are becoming more valuable but because the dollar is becoming less so. The rising market is likely an illusion of money. This means stock prices and market averages cannot be used to compare economic value over time. Furthermore, it means that prices in general cannot communicate the balance of supply and demand. QE greatly diminishes the signaling value of prices, making economic planning and real investment much more difficult.
Surely the Federal Reserve believes its actions will be beneficial and the price distortions it creates are of little consequence. But the models it uses to formulate policy may very well be as big of an illusion as the money it prints.
Keith Eubanks
Arlington, Mass.
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