The Stock Market ‘Wealth Effect’ Is Inherently Fragile
You probably thought the boom/bust cycle experiment that started with Alan Greenspan was over whenBen Bernanke came to the Fed. Or maybe you weren’t that naive to begin with. Either way, Bernanke is implementing very similar and in my opinion, dangerous economic policy.
When Greenspan was head of the Fed, he made it well known that the stock market was a favorite target of his. This became known as the “Greenspan Put.” This was the levitating effect of stock prices that placed a “put” or floor under the equity market. Greenspan was even more explicit a few weeks ago when he said:
“the stock market is the key player in the game of economic growth.”
I believe this is an incredibly misguided view of what the stock market is. The stock market is a secondary market where SAVERS exchange shares of stock in what is nothing more than an allocation of their savings. The price of those shares reflect the GUESSES of future expected cash flows. And as we all know, what you have in stock market gains is not real until you cash out of the game and exchange your shares with someone else. Of course, everyone can’t cash out of the game at the same time since all shares issued are always held by SOMEONE. So there’s an inevitable bag holder if the you-know-what hits the fan. There is no escaping that simple fact.