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Monday, July 8, 2013

The "Wealth Effect" or Why the Fed does what it does...

Welcome back from a very long 4th of July Weekend..

No time for dilly-dallying, so we begin..

By now, we know the stock market is rigged; artificially inflated and manipulated by the Fed.   And really this phenomenon has been occurring for the past 30 or so years, not merely post-Lehman..

The big difference between the 'now' and the 'then' is more about desperation taking priority over the need to be covert, and the increase in information out there in the Internet stratosphere allowing normal everyday people to be informed (if they wish to really know) of the big con.
But still, that doesn't answer the true question..

Why?

Why for over thirty years is so much importance placed upon the stock market by the Fed that it even needs to bother its chicanery in the first place?

Yes, we know the Fed was secretly created in 1908 by bankers to benefit bankers' interests...  And we know bankers bribed every politician they could for five years including a Presidential candidate named Woodrow Wilson to pass it.. which he signed into law in 1913...
And yes we know the adage of 'squeaky wheel getting the grease'; one we at A&G have used constantly in our desire for the everyday person to make themselves heard as their middle-class life is being stripped...

The wealthy and well to do.. the banker, corporate CEO and Professional 'I' Investor certainly has no moral quandary whether or not to squeak and squeal and Sooie! in the mud...

But we must go beyond that and re-ask...

Why is the stock market such a priority that government is happily willing to ignore the plight and suffering of most of the nation for the benefit of a particular segment of it?
Once the current recession-depression started to seriously take the US economy down with it into the pooper, Federal Reserve Chairman Ben Bernanke's hope was that rising asset prices would lead to a "wealth effect" that would encourage the American consumer to start spending again, and thus help the American economy finally leave the "Great Recession" behind.

This mindset works in simple terms like this..

Government will do the absolute Minimum it must do while giving the appearance it is doing the Maximum.  It is a magic trick... a slight of hand... a Con game.
To make the con work, you must get the 'audience' to really truly believe the government is doing All it can i.e. the image of a never-ending 'toolbox' full of 'tools' at the Fed's disposal.

A successful Con is all about Confidence.

Bernanke's predecessor- the deeply ugly (inside and out) despicable worm Alan Greenspan argued that intentionally manipulating stocks so they increase in value would work and bring about recoveries from recessions because:

"The stock market is the really key player in the game of economic growth... The data shows that stock prices are not only a leading indicator of economic activity, they are a major cause of it. The statistics indicate that 6 percent of the change in GDP results from changes in market value of stocks... "
This is the so-called "wealth effect": an empirical relationship between change in the value of assets and the level of consumer spending which implies that an increase in wealth will cause an increase in consumption.

In simple terms, con or fool the populace into believing the economy is recovering strongly based on a growing Dow and you will dupe enough people to spend their precious money or borrow to acquire impractical things they truly don't need...

This level of thoughtless spending will circulate through into the economy, increase corporate profits which will 'hopefully' cause them to expand hiring and the economy will grow to where what was once the carefully orchestrated illusion, now becomes the 'reality'...
In even simpler terms, its like holding an imaginary spoon and pretending to eat imaginary soup from an imaginary bowl while starving to tide you over while the real soup is not coming for some time...

Of course when corporations are making so much profit off market manipulation and using temp & part time workers to do jobs once held by full-timers with benefits, you're not going to get recovery no matter if Dow is at 25,000

Former Fed Chair Paul Volcker back in the early 1980s is the first one to really employ this strategy and it worked like a charm.  Of course times were different then..   We had a manufacturing base.

Not only did interest rates drop dramatically within a span of 6-9 months around 1981-82, but thanks to a strategy of never-ending catering to the stock market under Reagan the Dow grew from around 1024 when he took office in '81 to around 2200 by '89.
To put that into perspective, the Dow reached 1000 for the first time ever on November 14, 1972 when Nixon was President.  And the first time it reached 1100?

February 24, 1983

It took over 20 years for the Dow to raise 100 pts and then under Reagan, it increased by over 1100 pts (over 100% growth) in 8 years!

And the market hasn't stopped being manipulated since..

And really who is to blame the most for this con game?

Hate to say it but we are..
Well OK, not Us because you and we are informed but rather 'We' the people who are utterly clueless on markets and their manipulations; 'We' who attach national pride and patriotism to a statistic called Dow

It is the fault of all of 'We' who do not know, do not want to know and get very angered when attempts are made to make us know..

So the Dow's at fifteen thousand something...  And maybe today it will go up another 300 points based on some earnings projection or drop 300 based on a rumor...

And meanwhile the economy is in a meandering rut...  like trying to navigate a rowboat through oil spill-thickened waters... savings like standards of living slowly draining away..

And all people know to do are blame Republicans and Democrats.. or to scapegoat powerless minority groups..
The truth is too complex.. too anti-American:

The US Congress along with the US President since 2008 has done Absolutely Nothing to improve the US economy and by extension the lives of tens of millions of people who have suffered in some way from this recession-depression..

Don't feel insulted.. Its not like the governments of Britain, Germany, France, China, etc really make policy for the benefit for their populaces either..

No one in decision making power really cares if you financially survive or thrive or economically die in a ditch;  plenty of people to make money off your success and even more to profit off your doom...

Bankruptcy is a good business...
Instead, since the controversial TARP vote of 2008, Congress has punted the ball over to the Fed; a private entity whose charter specifies its purpose is work for the banks to strengthen them and provide an ultimate backstop so they don't take losses...

Did it in a closed door vote on Dec 31, 2008... evening hours.. This ensured few to none truly understood this great power shift for this and future economic crises..

And everything else has been a smoke and mirrors con job via playing with interest rates and giving false promises of better times ahead to get stupid people to spend.

That is why the Fed does what it does, why the market doesn't matter and why so many are needlessly suffering while being fed an endless array of lies...
And that is why short of a major market crash and long-term drop in the Dow causing the super wealthy and powerful to lose their shirts (all you should be wishing and hoping for this), nothing will ever change...

It's simply in no one's interests for change to occur..

No problem has ever been fixed when no effort has been made to fix.