Rabbit hole of the economy
The warning signs were there all along, and we have tried to use this space to trumpet them.
The facts are simple: The economy grew by less than 3 percent in the past year. The Dow Jones industrial index rose by more than 26 percent in that period. That indicates a major disconnect between consumer confidence and investor expectations, between Main Street and Wall Street.
This makes financial markets nervous and volatile, as they are driven more by data these days than by actual events. Such conditions may be attractive to speculators, but they are difficult and worrisome for investors.
In decades past, central banks influenced economies by manipulating short-term interest rates. Consumers, banks, business owners and investors could adjust the allocation of funds according to their best judgment of the balance between risk and reward in free markets. Millions of people allocated capital according to their individual circumstances and perceptions.
Free enterprise flourished among waves of growth and self-correcting recessions. Painful at times, it nevertheless generated untold wealth and a vast increase in the general standard of living around the world.
One effect of World War I and the sequel was to increase the power, reach and intrusion of central governments. Slowly, covertly, central banks followed suit. Despite examples of the failure of centralized power in former communist states and dictatorships, free markets became influenced, and controlled, by the powers of central governments.
Increased power appeared, in many cases, to foster a higher degree of arrogance by central government officials.
Central bankers thus felt empowered to influence and increasingly manipulate the allocation and flow of capital. Today, a small committee at the Fed feels able to dictate not only the short-term price of money but the amount and allocation of capital in the economy of nearly $17 trillion.
The Fed has controlled the economy by manipulating the price of money and of assets.
In the early 2000s, the Fed engineered the largest asset boom in history. A retrenchment that threatened the credibility of the banking system, a crash and depression followed. That dragooned the public into financing a rescue and recovery.
Shocked, the public began to hoard cash on an unprecedented scale. Consumer demand plunged. As part of an attempt to force consumers to spend and investors to accept increased investment risks, the Fed pumped in trillions of synthetic dollars and engineered negative “real” yields on bank deposits and “secure” Treasury bonds.
This fear generated volatility as asset prices exploded while the economy, in reality, remained sick. Investors attracted by ever-rising financial prices, based on Fed injections of synthetic cash, sought gains while ignoring economic values that should have been a warning sign.
The result is reflected in recent volatility. Fed data and statements about what it will or won't do send the Dow Jones into a tizzy, rather than events in the real economy. This “Alice in Wonderland” environment cannot continue.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at email@example.com.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Rossi: Crosby’s debt to NHL paid in full
- Pitt coach Narduzzi adds N.J. linebacker recruit
- Penguins’ Fleury surrenders 7 goals in 1 period of NHL All-Star Game loss
- Storm could drop 4-6 inches of snow on Pittsburgh area
- ‘Free’ wine kiosk initiative costs state Liquor Control Board $300K
- Nor’easter threatens Northeast with up to 2 feet of snow
- Linemen commit to PSU, boosting Franklin’s recruiting class
- Bloomfield bookstore owner bucks naysayers
- Vets study links PB pills, genetic variations to Gulf War illness
- Leechburg Road closed due to two-vehicle accident
- Energy companies vie for experienced workers with skills in high demand