Friday, March 30, 2012

The Federal Reserve Goes Parabolic

When traders say that a security has gone parabolic, they mean its price is increasing at an increasing rate.  Naive investors are drawn to the security, but to experienced investors the rapid increases signal an incipient collapse. That's because the excessive price stimulates experienced investors to sell. The upward spiral ends, causing those who entered the market during the parabolic increase to sell too. The ensuing crash is excessive, and the price falls below the security's true value because investors who otherwise would have held the security sell from fear.

The Federal Reserve Bank  has increased the money supply at a parabolic rate. The money supply has been increasing regularly since the 1930s.  Once of the results of the money supply's increase has been excessive investment in real estate, especially in politically sanctioned projects.  The projects include the urban renewal of the 1950s and 1960s, the construction of the suburbs, the development of the suburban mall, the expansion of retailing, and the sub-prime crisis. Some of these would have occurred, but to a lesser extent, without the Fed.  Others, like the sub-prime crisis, would not have occurred at all.

The excessive real estate investment arose because the money the Fed creates is deposited with risk- averse money center banks that prefer guaranteed returns.  Besides the real estate bubble of the past seven decades, there has been a government bubble. Rather than rely on democracy, which would not have supported the current level of spending if taxpayers had been forced to pay the market value of the cost of government each year, the central bank facilitates issuance of bonds, allowing the public to vote for politicians who spend more than the public has in resources. The public lacks the intellect to vote otherwise--its taste for doing what seems right or beneficial prevails because it lacks the ability to analyze the costs.  The advent of Keynesian economics causes supposed experts to offer the irrational advice that the public favors on its own--to spend money it does not have.

Hence, the Federal Reserve is inconsistent with democracy because it permits the public to vote for politicians who spend more than the public would want them to if they were required to cover the costs, and to spend more than government can pay back.  The resulting debt is becoming too large to pay back. Government will then deprive bond holders of their wealth by debasing the currency.This will harm those whose assets are in dollars or who receive wages.

The public does not want a dollar collapse--but it votes for it because the media and the government-financed school system advertise a distorted view of the costs and cripple citizens intellectually so that they believe the claims of supposed experts even when they are repeatedly wrong. A case in point is the economics profession.  Few economists predicted the sub-prime crisis or the tech bubble. But, despite their history of error, economists and the news media continue to broadcast the same predictions.

 The money center banks tend to invest with risk-averse, large corporations. It is evident that the corporations are risk averse because executives need to be paid in stock options whose purpose is to stimulate risk.  Wall Street sanctions publicly traded corporations through the stock market.  Executives are rewarded if the stock price rises. The corporations, then, only take risks of which Wall Street approves. The result of hiring psychologically deviant, risk-averse executives and then  countering the risk aversion with stock options is that the nature of the risk the executives take tends to pander to Wall Street's needs.  As a result, mergers and acquisitions tend to dominate firms' risk taking. Firms do not serve product markets--they serve financial markets.   

The largest way that the Fed distorts risk taking is through its subsidies to the stock-and-bond markets, and, consequently, hedge funds through (1) direct lending to hedge funds and Wall Street banks, (2) issuance of government securities that Wall Street sells, and (3) depression of interest rates that cause the stock market to increase inversely.  The rise in the stock market since 1937 is due to the Federal Reserve Bank. That rise has come out of the real hourly wage.

In 2008 the Fed began a massive quantitative easing that has caused bank credit to increase three fold and may potentially increase the money supply thirty fold.  This is equivalent to a parabolic price increase in the securities market.  The effects of the parabolic increase are (1) trivialization of technology at an increasing rate, (2) increasing crony capitalism, and investment in frivolous public-private partnerships, (3) subsidies to hedge funds and other socially unproductive financial firms, and (4) the current stock and real estate market comebacks.

The trivialization of technology is seen in the massive stock price increases of firms like Facebook and LinkedIn.  In the 19th century, technology meant the invention of the automobile and A/C electricity.  In the 21st century it means a program by which you add people unknown to you, called  friends, to a computer program whose purpose is also unknown.  

Like all parabolic price increases, this one too shall pass. But the collapse of the dollar's value does not just mean that a few greedy investors will be harmed. It means that all working Americans, suckers who have voted for Democrats and Republicans, will be harmed.

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