The short answer is the Fed has been propping up the stock market. And, high stock prices are not always tethered to traditional methods of stock valuation, like productivity, price, earnings, growth—all those “fundamentals” you learn about in the “Investing for Dummies” book. The market has become a highly manipulated gambling casino for the elite, where bank and hedge fund investors, high frequency traders, and the Fed’s massive injection of liquidity into the system have fueled a record-breaking, inflated, and unsustainable market.
Of course, if you are invested in this market—and a lot of working stiffs are—you have done well, but it’s a market without a foundation, a house built on sand. Unlike the wealthy, you probably can’t afford to lose your money when the market “corrects”—and it will.
These record-breaking Dow averages are not the result of the “invisible hand of the free market,” because there’s no such thing as a “free market.” Central banks around the world are injecting $200 billion into the system, per quarter, to avoid a market crash.
Tyler Durgen, at Zero Hedge, says that, “without the Fed’s (and all other central bank’s) liquidity pump, the S&P would be about 70% lower than where it is now.
Mike Whitney at Counterpunch writes: “. . . in the last five years, stocks have tripled because the Fed, has added a “hefty $4 trillion in red ink to its balance sheet. Naturally, when someone buys $4 trillion in financial assets, the price of financial assets goes up.”
Besides, the Fed doesn’t give a rip about the real economy. If it did, it would have loaded up on infrastructure bonds instead of funky mortgage backed securities (MBS). The difference between the two is pretty stark: Infrastructure bonds put people to work, circulate money, boost economic activity, and strengthen growth. In contrast, MBS purchases help to fatten the bank accounts of the fraudsters who created the financial crisis while doing bupkis for the economy. Guess whom the Fed chose to help out?
Whitney is talking about the Fed’s practice of Quantitative Easing (QE)— buying toxic assets from banks—and then lending money back at zero percent interest. This gives banks and hedge funds tons of free money with which to speculate. This same policy that enriches the already wealthy takes money out of the pockets of ordinary people who can’t earn any interest on their meager savings accounts.
The Fed announced on Wednesday, October 29, that it would end QE3, effectively removing one of the helium tanks from this inflated stock market. It remains to be seen how the markets will react.
While too big to fail banks are speculating like crazy, corporations are busy pumping stock prices. Instead of doing something constructive with the billions in cash they are sitting on, say, creating jobs here at home, executives are increasing share value (and the value of their stock options) by buying back company stock.
Back in the real world we are left with higher food prices and lower wages. The sticker shock you’ve been experiencing at the grocery store is not just because you shop at Whole Foods. In September, the BLS reported that the price of ground beef increased 17 percent since September of 2013.
The Obama administration claims credit for a lower unemployment rate, but it fails to mention that the jobs it helped create are mostly low paying, part time, or both. If you take a part-time, low-paying job, you are considered “employed,” so you fall off the rolls even though you can’t live on what you make. And, if you give up looking, as many have, you are no longer counted. The so-called lower unemployment rate in no way reflects the reality of the job market.
In April of this year, the New York Times reported the following:
The deep recession wiped out primarily high-wage and middle-wage jobs. Yet the strongest employment growth during the sluggish recovery has been in low-wage work, at places like strip malls and fast-food restaurants.
In essence, the poor economy has replaced good jobs with bad ones. That is the conclusion of a new report from the National Employment Law Project, a research and advocacy group, analyzing employment trends four years into the recovery.
What this reality check tells you about our economy, our markets, and our banking system, is that they are rigged to benefit the elite. They are unstable, unsustainable, and do not serve the majority of working people. Fed policy is to give banks hundreds of billions in gambling money which does nothing for the real economy and further enriches the already rich. Meanwhile, 16 million American children live in poverty, and 1.3 million school children are homeless.
The next global “crash” will happen when international central bank manipulation of all varieties ceases to work. The phony economy, this “house of cards,” will fall, and bank balance sheets will go up in flames. Because banks are interconnected, when liquidity locks up, they will all go down together, and the markets and what’s left of the economy will go down with them. Some say the coming crash will make 2008 seem like a dress rehearsal. The wealthy, of course, will be fine, but ordinary people around the world will suffer.
Mike Whitney blames the surge in wealth at the top and the growing gap between the rich and poor on the Fed’s zero interest rate and QE policies put into place in 2008—policies deliberately designed to transfer money from the poor to the rich. In other words, the crushing of the working and the middle classes isn’t an accident; it’s a feature of an economy run by and for bankers and billionaires.