Wednesday, November 28, 2012

Thought Experiment

The common theme out there is that the Fed is trying to create a wealth effect with its monetary policy. The wealthier we are the more we spend. I think that's safe to say.

Investors of the past made money in bonds. They also made money in stocks. Right?

If the Fed comes in and buys up bonds then that forces interest rates down. Right?

If interest rates on bonds are driven down then at some point investors can no longer get wealthy owning bonds though. Nobody's getting rich off of a -0.74% 10-year TIPS held to maturity. Right?

That would mean that the Fed has put a stop to any wealth building that bonds once did. Right?

If the Fed has removed one of the two most obvious ways for investors to get wealthy then perhaps someone can tell me how this is supposed to create a permanent wealth effect.

Oh, wait. I remember. Never mind.

It's all about inspiring confidence. What have confident investors been doing for the past few years? Doubled their money! That's what. It's a sure thing (again). Can't lose (again). No doubt about it. That's the one thing we can always count on. The stock market only goes up.

Let's look at this another way.

The Fed bought Investment A (bonds) but not Investment B (stocks). Clearly everyone needs to pile into Investment B then. That's just common sense.

Forehead. Desk. Whack. Whack. Whack.

As always, just opinions of course.

11 comments:

Luke Smith said...

You can look at it as confiscation, if you like. The Federal Reserve has confiscated $2 trillion of bonds (government and GSE) since the financial crisis which, like you say, has confiscated the 'wealth effect'. Consider that the Federal Reserve and US government did likewise during the Great Depression; this time however, the Fed has more power.

Anonymous said...

The Fed bought Investment A (bonds) but not Investment B (stocks).<<

The Treasury through the PPT is buying stocks--so the Fed can concentrate on bonds only. They got our backs!!

We have reached a permanently high plateau in bankstopia!

Mr Slippery said...

Your last two posts suggest that stocks may be sitting atop a Tower of Terror. Keep your hands and feet inside the ride at all times and thank you for visiting Dizzy Land.

Stagflationary Mark said...

Luke Smith,

Great Depression? We dodged that bullet. I have it on bad authority that nothing bad will ever happen again.

Stagflationary Mark said...

Anonymous,

Bankstopia? Awesome! I can hear the ad campaign now.

It's just like UTOPIA but we've replaced U with BANKS!

Stagflationary Mark said...

Mr Slippery,

Your last two posts suggest that stocks may be sitting atop a Tower of Terror.

No! Power of Error! That's what I was suggesting.

THERE'S ABSOLUTELY NO REASON TO GET THE DEPARTMENT OF HOMELAND SECURITY INVOLVED!!

Sorry about all that screaming. I wasn't sure if you could hear me with all those black helicopters circling my house, lol.

Gallows humor. Sigh.

mab said...

It's just like UTOPIA but we've replaced U with BANKS!

Clever!

Rob Dawg said...

Another thought experiment. What if the Fed just zeros their balance sheet? The banks owe nothing, the Fed is owed nothing.

See? Nothing changes. Scary isn't it.

Anonymous said...

It's just like UTOPIA but we've replaced U with BANKS!<<

Inspired by Winston Churchill who labelled the socialist UK government that was plagued by rationing even in the early 1950s, long after the war, as Queuetopia.

Stagflationary Mark said...

Rob Dawg,

What if the Fed just zeros their balance sheet?

One keystroke to rule them all
One keystroke to find them
One keystroke to bring them all
And in the darkness bind them

Stagflationary Mark said...

Anonymous,

Queuetopia? Ouch.