In his column “The altar of economic faith”, Associate Editor Gil Smart writes:
“Stocks are soaring for one basic reason: The Federal Reserve continues to conjure money from thin air, buying ‘assets’ with it, pumping money into the big banks that are supposed to lend it to you and me and the company down the street. ‘If companies use that money to buy equipment, and households use it to buy homes and cars, the economy gets a jump,’ reports Reuters. Right. But what if that money doesn’t get pumped into the ‘real economy?’ What if it finds its way into stocks and commodities and bonds instead?”
WATCHDOG: Smart hits the nail on the head concerning monetary easing pumping up the stock market and little else.
Randazzo’s claim appears in a September 13, 2012column “How Quantitative Easing Helps the Rich and Soaks the Rest of Us”
Randezzo states, but without any reference or further substantiation: “The problem is that investing in commodities can push up prices on things like gas, meat (because of feed corn prices), bread (because of wheat prices), and even orange juice. There certainly have been other contributors to commodities prices going up, but if the Fed has boosted stocks, they’ve boosted commodities too. So not only are the cronies gaining from quantitative easing, there is a negative wealth effect too.”
We don’t understand how a higher evaluation of the stock of a company impacts the price of what it sells. We must have slept through that class at Cal Berkeley. Nor does Randezzo attempt to explain the notion or refer to any authority. Perhaps Smart or some reader can explain it.
Lastly, the answer to “what else” is one that Smart has consistently objects to in his columns. Monetary easing must be combined with fiscal expansion (more deficit spending) during a sharp recession in order to restore prosperity. Upon recovery, the combination of greater revenue and less social safety net expenditures will restore a balance budget and begin to reduce debt, as occurred towards the final years of the Clinton administration.
With all due respect, here is a message to Gil Smart.
First, stop mistakenly comparing the federal government with households budgets. When you bought your house, you did not think you were undertaking ruinous spending, because you could balance the debt you owed with the value of the house you owned. It would have been different if you, your wife and the kids had spent the money at luxury resorts, fancy clothes and expensive entertainment.
Second, when the federal government spends for highways, communications and education, the deficit is being offset by the value of the asset created. We can drive on the highway, we can run a more efficient and competitive economy through better communication networks, and educating youngsters prepares them to be productive members of society in the future rather than unemployed. All these are investments; not money down the drain.
(On the other hand, the ten percent of our Gross National Product spent on senseless wars, on an inefficient health care system, and the misguided War on Drugs is money down the drain… counter productive. Ignorance and stupidity is at the root of our faltering economy and national debt.)
The talk about how every American is born to $50,000 in federal debt does not take into account that every child is born to many, many times that in the current value of federal infrastructure. Unfortunately, we cannot find an article on point. Here is an opportunity for a fledgling Nobel Award candidate!
