The Federal Reserve has created an environment where Wall Street needs to root against the economy to thrive.
On a regular basis, we are greeted with headlines proclaiming a new all-time high for the Dow Jones Industrial Average, an overall indicator of the stock market comprised of 30 blue-chip companies. We've seen the market race through the 15, 16 and 17,000 point threshold as if it were nothing.
Stocks have never been better, let the champagne flow!
Near-zero percent interest rates from the Fed along with their continued bond purchasing, otherwise known as quantitative easing infinity, have created this skyrocketing market we find ourselves in the middle of. This is the era of easy money, brought to you by your friendly bankers at the Fed.
But this era of big money, created in the aftermath of the 2008 crash, will only last so long. The Fed has continued to warn that the incredibly low interest rates will, at some point, need to be raised; that the continued bond purchasing will have to end. While the Fed has indicated that it will phase out the bond purchasing by November of this year, the bigger question surrounding interest rates still looms large over the markets.
[sharequote align="center"]Today's economy is not built on job growth, it's built on debt growth.[/sharequote]
While the bond purchasing has infused huge sums of money into the system, well over $2 trillion, the interest rates affect far more than just the money supply. Federal Reserve interest rates affect borrowing as a whole, whether it's a residential mortgage or a corporate bond or loan. Raising the rate, which is barely hovering above zero percent right now, would slow down whatever economic growth is occurring.
Disposable income that is not being used for spending will drop as more money will be devoted to paying higher interest rates on mortgages and credit cards. Investment falls as the safety of saving money in banks and bonds becomes more attractive with higher interest returns. Higher interest rates bring lower consumption, greater saving and less investment - all things that the stock market does not like.
The Federal Reserve, aware of this effect, had previously set a goal of 6.5 percent unemployment before raising any rates even slightly. Meeting in March of this year, they unanimously agreed that their target was “outdated” and needed to be changed.
What was it changed to? We're not exactly sure.
The Fed decided to look at more “qualitative” measures in the economy, rather than a set point in unemployment, to determine when the rates should rise. Wall Street breathed a collective sigh of relief and stopped building their financial ark, no longer worried that the rates would rise. They cracked open the champagne, broke another bunch of records and the era of easy money continued.
While it may sound a bit crazy, the stock market is rooting against America. As long as the economic indicators, especially the unemployment rate, remain constant or even regress, the interest rates will remain and Wall Street can continue to celebrate.
Traders work on the floor of the New York Stock Exchange after the ringing the Opening Bell on April 1, 2014 in New York City. Spencer Platt/Getty Images
If the economy booms and hiring goes through the roof - don't hold your breath – the Fed will undoubtedly raise the interest rates, a prospect that Wall Street is dreading. The opposite, a lackluster recovery with a weak job market, elongates historically low interest rates and will continue to produce record-breaking averages in the market.
This is the result of federal intervention in areas they have not been granted power to intervene. We see the results of federal level overreach everywhere.
Obamacare: A wildly unconstitutional law aimed to reduce health insurance costs and provide the uninsured with “free” insurance, compliments of the taxpayers. The result? Continually increasing health insurance premiums, a lack of insurance options, higher taxes and health insurance company bailouts.
Student Loans: An unconstitutional attempt to manage the growing student debt by backing them with taxpayer money. The result? Colleges understood that taxpayer backed loans equal free money and raised tuition.
Education: The federal government has long been involved in education though the Constitution gives them no authority to do so. The result? Test scores and educational rankings have fallen and we are often below average in all measures within the developed world. But don't worry, more money will be coming soon!
Traders and visitors depart after the closing bell of the New York Stock Exchange on September 16, 2013 in New York City. Credit: Getty Images
The is a pattern of rewarding the bad and often punishing the good. We see it in tax policy, our educational funding, insurance bailouts, financial bailouts and we see it today in the stock market. The Fed has rewarded a poor economy and heaven forbid it snaps back to life!
Many economists will critique the minutia of the Fed's policy and their timing to either enact or roll back their policies. The larger critique lies not in the details of what they did, but in their overall entry into the situation in the first place.
Remember those quaint days where a surging stock market was good for America? That is because those markets were built on actual growth, real investment and a healthy economy that grew from itself. People had jobs, they spent money, businesses invested to grow larger, hired more people and more people had jobs. Wash, rinse and repeat.
Today's economy is not built on job growth, it's built on debt growth. The stock market isn't surging because jobs are plentiful and companies are growing. The stock market has broken records because of an artificial entry into the market – the Fed.
The Fed, rather than jobs or real investment, is now the driver behind our raging stock market and, in some part, our sluggish economic growth as well. In true progressive fashion, that which was free is now controlled; the decisions that once belonged to the masses, belong to the few.
The perverse situation in which the stock market would root against our growth to preserve their wealth is the direct result of the corruption of the free market by the Fed. The days of the markets reflecting the economic health of the country are long gone. Welcome to the era of omniscient, federal guidance.
All hail the visible hand of the Fed!
For other articles and writings by Darrell, please visit the Milk Crate.
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