Going up?

(I haven't had an economics post in awhile so here's a brief comment on recent developments. Frankly, it's a bit depressing to do this very often.)

The stock markets roared ahead today and the DOW is within spitting distance of 11,000. The MSM chorus is singing in harmony: surely this is another sign of “the recovery.” But waiting for the recovery is increasingly like waiting for Godot.

Why did the market go up today? Because it can. The media can always find some news story as an explanation. Ignore them—no one knows why the market does what it does, not even the traders.

Here are a few facts. Since the crash two years ago, there has been a steady outflow of investors from the market and trading volume has dropped accordingly. If there was an inclination to reverse this, the bizarre “flash crash” last May (when the DOW dropped 1000 points in minutes) reaffirmed the suspicions of an out-of-control market. More than a few investment advisers have advocated putting a big “Danger! Keep Out!” sign on Wall Street.

Because they like the black-and-whiteness of numbers, the media want to hang on to the notion of the DOW as a barometer of the nation’s economic health. If that was ever true, today there is no evidence for such a correlation. Nonetheless, even supposedly sober news outlets like NPR and PBS breathlessly led their news summaries with reports of the DOW’s jump today.

Stock markets are likely gaining for one simple reason: money, and the anticipation of money. The one real economic news story today was the announcement that the Bank of Japan would be buying lots of public and private bonds and just about any other kind of financial paper it can get a hold of. This is what the Federal Reserve did for over a year after the crash and is likely to resume doing late this year. Oh, and the European Central Bank as well as the Bank of England have been doing it too. All this is their way of trying to pump money into their economies.

The reason for this is the same in each place. Interest rates are the way central banks normally regulate money supply and try to adjust the economic thermostats of their respective countries. The problem is that interest rates have dropped to zero. The national banks literally can’t give money away. Or as in the US, private banks will take it but they’re just squirreling it away because their own financial state is so precarious and because businesses aren’t borrowing since they can’t find anything to spend it on.

Bankers, however, do have a lifestyle to maintain so they have to make money someplace. One place they are willing to put some of that free money is the stock market. In this instance, Wall Street is really not much different than The Strip in Las Vegas. The banks are playing craps with the Fed’s free money and that activity is pushing up stock prices, even though there is little or no economic reason for the markets to be going up. Is the Fed upset by this? Not really because there is some hope that rising stocks will stimulate economic activity (note: the opposite of the way people assume it works) and besides, nothing else seems to be working.

Could it work that way? Because if it does, then those rising prices are anticipating economic growth and if you don’t get in now you’ll have missed the action. At least, that’s the kind of talk you’ll hear on MSNBC or from your broker. Right now the chances of this happening seem to be somewhere between slim and none.

The nation’s economic problems—or the world’s economic problems, for that matter—are not going to be solved on Wall Street. The economic hole we are in was years, if not decades, in the making. Wall Street doesn’t have enough shovels to dig us out. Besides which, the bankers' and brokers' sole interest is in digging themselves out of the hole. Once they’ve done that, they’ll rip the shovel they let you borrow out of your hands so fast, it’ll leave splinters.