We're Talking Stock Market Bubbles (This One)
We're talking stock market bubbles over at the Mises Institute thanks to Frank Shostak's attempt to graph liquidity changes and stock prices in a series of graphs covering the last 80 years and an attempt to logically deduce the results of fiscal planning:
The demand for the services of the medium of exchange is also affected by changes in prices. An increase in the prices of goods and services leads to an increase in the demand for the medium of exchange. People now demand more money to facilitate more expensive goods and services. A fall in the prices of goods and services results in a decline in the demand for the medium of exchange. Now, take the example where an increase in the supply of money for a given state of economic activity has taken place. Since there wasn't any change in the demand for the services of the medium of exchange, this means that people now have a surplus of money or an increase in monetary liquidity. Obviously, no individual wants to hold more money than is required. An individual can get rid of surplus cash by exchanging the money for goods. All the individuals as a group, however, cannot get rid of the surplus of money just like that. They can only shift money from one individual to another individual. The mechanism that generates the elimination of the surplus of cash is the increase in the prices of goods. Once individuals start to employ the surplus cash in acquiring goods, this pushes prices higher.
Personally, i hate the title of this piece (Obama's Mini Stock Market Bubble). This has little to do with Obama, and a lot more to do with the traditional policy of "Apres moi, le deluge." (Did I spell that right? I'm not going to look it up. I'm lazy today.) That was the policy of French monarchy. Inflate all you can. Don't worry, you'll be dead and the next generation will pay. Nowadays, it's the next President who pays, and so he inflates (and the bankers cheer), hoping to buy 8 years of political capital. Bush did it. Clinton did it before him. Reagan did it. Carter did it. Nixon, LBJ, etc... Or maybe you could say their Congresses did it, or both?
Some of you may recall that I've been speculating that we are in a mini-bubble, particularly in banking stocks in a few comments I've made over the past three weeks. I'm not totally convinced by Shostak's arguments as I've never been one to rely on charts to make up my mind. I just think about things logically (or attempt to). A glut of dollars on the market leads people to bid up prices. It's the reverse process of production, where increases in production drive down prices.
Look, it's not great that the market is up 25-30% if the money supply has increased even more than that to make it happen. That means you are poorer. That means you would have been better off with the market at 666 and the money supply untouched. Purchasing power measures wealth. If your PPM is eroding faster than the market is going up, you're getting poorer (albeit less poor than those with no portfolios.)
I'm sure we can all see the logical consequences of this. The people hurt the most by inflation are the poor and middle class. This is why the Federal Reserve works against Social Justice, even though it is the prized institution of the Progressives. (As Naomi Wolf admits, nobody on the Left has a clue how the Fed works. This isn't really surprising, since the reactionary wing of the Left is more concerned with creating a money-less society and hypeinflation can bring that about, see: Lenin's purposeful hyperinflation at the beginning of the Revolution.)
We'll be talking more about this in the future I'm sure, but here is an article by Thomas Woods, Austrian School Economist and author of Meltdown, discussing the Fed's role in this whole fiasco, from beginning to end.
I’ve written quite a bit about ABCT [Austrian Business Cycle Theory], both in my book and in numerous articles, so I won’t repeat the theory in any detail here. What matters for right now is that the theory, which won F.A. Hayek the Nobel Prize in 1974, exonerates the free market of blame for the boom-bust cycle. Instead, the culprit is the government-established central bank (in the American case, the Federal Reserve System), whose activities lead the economy into an unsustainable configuration that can seem like prosperity for a time, but which inevitably collapses in a bust when the accumulated resource misallocations reveal themselves. (Yes, the theory can also account for booms and busts that occurred in the absence of a central bank; see Jesus Huerta de Soto’s treatise Money, Bank Credit, and Economic Cycles.) Fiscal and monetary stimulus, in turn, are based on a juvenile misdiagnosis of the problem, and can only misdirect the economy still further.
Meanwhile, Gary North, another Austrian School Economist, reports there are no green shoots. This is a sucker's rally.
David Rosenberg, the chief economist at Merrill Lynch, retired last week. He may still be bullish on America, as the old Merrill slogan went. He is not bullish on the present U.S. stock market. He calls the rally a sucker's rally.
From the beginning of this rally, he has maintained that it will not be sustained. He has not changed his mind.
David in Qatar