I’ve alluded to it a few times before on this blog, but always gently – I’ve also, in the past few months, been telling my nearest and dearest to be very careful about plowing their money into the stock market… but now I think that I can make this point definitively.
Here’s how I figured the game was being played. Governments – most notably the US government – have been jamming money into banks through various schemes. These schemes are generally referred to as Quantitative Easing. Quantitative Easing is really just a glorified way of saying that these governments are printing money. The idea then is that these banks would start loaning money to consumers and businesses once they were given piles of cash. Of course, it didn’t work out that way – as we all know, the banks didn’t start loaning money again.
So, what’s happening? Well, I reckon that this money is probably going into the stock market. Now, if freshly printed cash is being channeled into the stock market, what does that mean? Well, that probably means that a stock market bubble is beginning to inflate.
Okay, let’s go through this slowly. What does the stock market do? Ostensibly, the stock market acts as a sort of giant investment tool. The stock market – through all the little shouting men who work there – channels money into businesses that its collective brain feels are going to be successful. Nice concept, right? Well, sometimes the stock market channels money into nonsense firms. Remember the dotcom bubble? That was the stock market channeling money into nonsense companies – this is what we call a stock market bubble… and bubbles will always burst, which will always end in a stock market crash.
Now, if the banks are channeling their newly minted cash into the stock market they’re probably chasing illusions – by that I mean that they’re probably over-investing in companies, just like they did during the dotcom bubble. Investment opportunities aren’t exactly plentiful in these hard times, so we can only figure that those companies that are having their stocks inflated on the back of this new money aren’t altogether as great as their investors make them out to be.
Yet, not many commentators are making this call. Dean Baker – one of the first economists to call the housing bubble – certainly is. Another commentator making this assertion is Yves Smith (see video posted below). In fact, by making this call now – and provided it turns out to be correct – I think I’ll be one of the first. That is why I was so reluctant to do so explicitly for a while now (I’ve been talking about this with personal acquaintances since the beginning of the summer). But, upon careful consideration, I now feel confident enough to make this call.
This also ties in with other ideas I’ve been putting forward on this blog. In my series on the rise of finance (see here: Part I – Part II – Part III) I’ve been trying to show that, for the past thirty or so years, the world economy has been running on financial tricks of various kinds. I’ve been trying to show that, due to a major decline in manufacturing profits the world economy is coming to rely more and more on speculative/financial profits.
Underlying this argument is the assumption that, now that the dotcom and, after it, the housing bubbles have burst, the world economy requires a new bubble to be inflated in order to keep the whole thing ticking over (you see, a capitalist system cannot function without strong profit incentive). I now think that this bubble will be in the stock market.
I’m not saying that you should rush out and sell all your stocks tomorrow. This process could take a long time. But if I’m correct what we will see is the stock market climb ever higher, while the real economy seems perpetually mired in the swamp of recession and unemployment. Watch this space!