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 firstname.lastname@example.org.