Saturday, March 13, 2010

Money Printing & The Stock Markets 2009 - 2010

The world major stock markets have performed extraordinarily over the last 12+ months. This is clearly evident by the following graph, which demonstrates the trend for said time period.

Nevertheless, what is less often asked is from where is the required funding coming from. Has productivity significantly increased? Has investment increased? Or has some other demand and/or supply shock occurred? The answers to these questions are clearly no. Massive government intervention, which also includes those of monetary authorities, all over the world have had a significant impact in generating the sentiments to cause the stock market to go up. Something cannot come from nothing: money printed has flooded the markets. The U.S. dollar is presently the world reserve currency. As long as this continues to be the case, Federal Reserve policy (i.e. FOMC) will invariably and disproportionately influence the markets.

Therefore, it is of no coincidence that the adjusted monetary base, the mount of money printed by the U.S. central bank, has equally expanded (in absolute terms). Notice the trend; it is almost identical in both charts.

“Austrian” Theory of the Business Cycle tells us that the pursued economic policies, although causing a momentary and illusory restoration of economic stability, are sowing the seeds of the next crisis. It is difficult to appreciate any other time in history where there have been no major wars and fiscal discipline being excessively out of order. The “Austrian” economists, whom I count myself to be among them, were the only ones who called the 2008 economic collapse. We are the voice in the wilderness warning those who are being led by false economic prophets. Timing is difficult to predict, but as each day passes by, we are getting closer to our next political and economic crisis. Unless dramatic and unprecedented (at least in terms of our generation) changes in policies and incentives take place, this is a foregone conclusion.

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