The following was written by Cory Massimino.
In the years following the 2008 financial crisis the stock market, unlike the rest of the economy, has been outstanding. Last Monday the Dow Jones Industrial Average and Standard & Poor’s 500 stock index reached record highs following continued confidence in the Federal Reserve’s expansionary monetary policy. Shortly after trading began, the S&P hit the 1,800 point mark and Dow industrial average exceeded 16,000 point. Since then, the stock market started to stall a bit but it is still doing comparatively excellent.
It is no surprise, however, that the stock market continues to excel while the rest of the economy has been stagnant. The massive quantitative easing that has been furiously pursued by Ben Bernanke and the Federal Reserve benefits stock prices, but this growth doesn’t translate to real economic development. The success of the stock market in recent years is merely an illusion of false wealth; another bubble that is incessantly being propped up by the central bank.
When the Federal Reserve expands the money supply and artificially lowers interest rates it distorts the structure of production, leading to a misallocation of resources. The monetary expansion diverts capital to sources that entrepreneurs falsely see as profitable. When their investments reveal themselves to be unprofitable, the bubble bursts, leading to a recession where the market must make necessary corrections to return to prosperity. The progress leading up to the crash is the illusion.
The false sense of economic growth and increased wealth is not actually a result of increased productivity and ingenuity, but instead an artificial boom created by the central bank’s initial policies. This can be seen in the stock market bubble in the 1920′s that resulted in the Great Depression, the dot-com bubble of the 90′s which ended in a recession in the early 2000′s, and, most recently, the mortgage crisis that played a huge role in the massive 2008 downturn.
Since the Federal Reserve has done everything in its power to keep interest rates at historic lows and increase the money supply as much as they can, the stock market has, not coincidentally, been doing fantastic. This is because the growth in the stock market is nothing but another centrally created bubble. Despite this seemingly great, but catastrophic, news in the stock market, the real economy has not substantially improved.
There is no real growth occurring, as seen by recent GDP and employment measures. Gross Domestic Product currently stands at 1.65 percent. The unemployment rate is sitting at 7.3 percent, down from a high of 10 percent. However, unemployment statistics are often misleading because a different measure, which includes discouraged, marginally attached, and part time workers, is at 13.8 percent. Furthermore, the labor force participation rate is at its lowest point in decades, with only 62.8 percent of people over 16 accounted for.
The Federal Reserve has shown no sign of ending its relentless monetary easing. The new chairwoman, Janet Yellen, is expected to continue the Fed’s massive mortgage purchases every month, pumping $85 billion into the economy. With no sign of tightening, the stock market will continue to excel, while the real economy suffers, until the bubble bursts and the previously optimistic “growth” reveals itself to be yet another massive delusion.
It is a deadly mistake to view a successful stock market as a sign of a growing economy. As seen by the last 5 years, they are two separate things and there is no reason to think stock market growth will translate, or even correlate, to actual economic growth. The success of the stock market is merely another Federal Reserve created bubble that will eventually come to a crushing end, sending the U.S. economy into yet another deep recession.