The Wealth Effect

The Wealth Effect is the premise that when the value of portfolios rises due to escalating prices, investors feel more comfortable and secure about their wealth, causing them to spend more. The theory goes that investors spending more will invigorate the economy thereby increasing production, jobs and economic activity.

The Wealth Effect theory is the rationale that the Federal government and Federal Reserve have been using the last seventeen years in order to justify the activist approach to fiscal and monetary policy they both have taken.

Because the liquidity the Federal Reserve and Federal government has injected into the economy has never made it out of Wall Street onto Main Street the Wealth Effect has been limited to a very few people the last nine years.

For the few connected enough to access these funds it has been government provided free wealth. For the bottom 90% it has meant increasing poverty, less income, less wealth and ever more debt.

You can draw one of three conclusions about this situation:

·       The folks at the Federal Reserve and in the government are so clueless they have no idea this is going on.

·       The folks at the Federal Reserve and in the government intended this to be the outcome.

·       The folks at the Federal Reserve and in the government did not intend this as an outcome, the policies have failed but they are unwilling to say, “We are sorry, we were wrong.”

Whichever conclusion you wish to draw the next conclusion has to be that these folks ought not be doing the jobs they were given.

Living A Myth

We are trying to live a myth.

This is the extent we have had to go to in order to perpetuate ‘the myth’. We have, as part of our belief in the myth, a fundamental belief that a product or service that cost 1x (in constant dollars) in Mumbai or Mexico City is worth 37x in New York City on a never ending perpetual basis. That is an historic and economic impossibility. However our myth is wholly dependent on something being worth 37x in New York City than in Mumbai. Without that 37x we cannot service our debt. How do we make that 37x happen? Regulation, exploiting our position as the reserve currency in order to export our inflation or deflation as needed, and a variety of other tools.

Now there are people who believe we can do this indefinitely. I am not one of them. Will it end ten hours from now or ten years from now? I do not know.

You can buy a new car in New Delhi for about $1800. If you could pay $1800 for a new car in Kentucky then Ford, GM and Chrysler go under along with the UAW. If we paid $3300 for open heart surgery as they do in Mumbai (that cost you $110,000 in New York City) it collapses our healthcare system overnight. Why? Because money has been borrowed based on those required price points.

It is important to grasp the exponential rate at which this debt has been growing. When Obama took office the derivative market was estimated by the IMF to be about $250trillion. It is now estimated at $700trillion. This represents debt. Saying the United States borrowed this much or that much in whatever period of time no longer represents the actual ‘debt’. This cannot continue forever.

 

 

Page 20 of 88« First...10...1819202122...304050...Last »