The Real Price of a Fake Economy

Federal Reserve Chairman Ben Bernenke

Last week’s rapid stock sell-off, which ended as quickly as it began, exposes underlying fractures that remain in our financial markets even this long after the 2007 meltdown. Moreover, and more important for our daily business, it exposes the fundamental flaw behind ongoing “recovery” efforts in the American economy. And if it doesn’t give us warning that our current economic track is ultimately unsustainable, that only proves we weren’t listening.

Multiple news sources used the word “plunge” to describe the Dow’s 354-point nose dive, though in historic terms, Thursday, June 20th, 2013 doesn’t even rank. Whether in absolute point terms or percentages, Thursday’s slide barely registers. But because we’ve grown accustomed to supposed constant growth like Jack’s beanstalk, any triple-digit slide seems catastrophic, at least to the financial journalists who cover Wall Street for the national publications.

But most Americans don’t own stocks. Most Americans shouldn’t own stocks, because we lack the specialized skills for reading market movements and anticipate future trends. While many Americans indirectly hold stock through mutual funds or retirement portfolios, in practical terms, Dow fluctuations are as distant from our lives as castor bean futures or the floating value of the Mozambican metical on global currency markets. It’s hard for Americans to care.

We should care about this seemingly remote economic benchmark, not because it impacts us (it barely does), but because it provides a valuable barometer of our economy’s basic weakness. Thursday’s stock drop took place not in response to market forces, but as a lemming-like response to the Federal Reserve’s decision to scale back economic recovery measures. The suggested end to fictitious influences caused very real financial blowback.

Treasury Secretary Jack Lew

Since the global financial meltdown of 2007-2008, multiple governments, including America’s, have trumpeted the goal of “recovery.” Most citizens hear that and think it means getting people back on their feet, encouraging new hiring, and ensuring smooth working for the whole economy. Yet the Demopublican duopoly that dominates government has grown infatuated with the financial sector. They’re primarily trying to regain the boomtown mentality that dominated a decade ago.

Financial journalists got news-drunk when the Dow closed above 15,000 in May. But the nearly continuous bull market since 2009 has been driven by “quantitative easing,” a bureaucratic euphemism meaning the Treasury encourages buying by cheapening the value of a buck. This has flooded markets with abundant bargain-basement cash, while producing a profoundly topheavy economy, as dough rushes to the top by draining value from ordinary wages.

Joseph Stiglitz notes that 93 percent of the “recovery” since 2009 has accrued to the dreaded One Percent. This happens partly because President Obama packed his economic advisors with Robert Rubin acolytes, who assume the financial services industry’s innate goodness. They’ve performed remarkable fiscal gymnastics to infuse markets with cheap money. This produces a strong economy in the aggregate, but doesn’t help most ordinary Americans.

Financial operators are herd beasts. When the Fed throws cheap money, financiers crowd around, grab what they can, and follow the leader. If one broker makes bank on stocks, everyone joins in. If somebody gets rich gambling on tech stocks or housing prices (let’s just imagine), hundreds want on the bandwagon. This creates illusory market pressures that seem to increase the value of a desired commodity beyond comprehension.

This explains how, for instance, gas prices skyrocketed during a period of low demand. History shows us, though, that such herd pressures are appallingly volatile. It takes only one herd member fleeing the bubble to create panic. Commodities, and the complex derivatives based on commodity values, go into freefall. And anybody who trusted financial trend-spotters to know what they were talking about takes it in the wallet.

President Barack Obama

The two biggest Dow point rises and two biggest drops ever occurred less than one month apart, in September and October of 2008. This market volatility, which continues less dramatically today, reflects the artificial pressures steering the market, particularly cheap money completely separated from any process of creating value. And it reflects political and economics elites’ attempts to keep the party going long after it should have burned out naturally.

May’s record Dow high, and June’s panicked Dow sell-off, prove that America’s economy has become estranged from the process of creating value. Attempts to preserve old ways of doing business have become a liability, because they demonstrate themselves unresponsive to real needs. But our entwined financial and political sectors won’t let their sick puppy die. Yesterday’s solutions can’t fix today’s problems. It falls to us citizens to demand something better.


On a related topic, see also:
High Noon for the Economic Assassins 
How the Economy Hit Bottom—and What Comes Next