Maybe I’m an economic ignoramus, but I grew up believing that paper assets represented tangible value. So, my question is this: during the climb of DJ averages to above 15,000 where was the true value behind those stocks being increased? Ditto for bonds?
Expanding markets and sales? Growth of manufacturing and services to meet customer demand?
I don’t think so.
Likely the bubble in prices was driven by the various QE gimmicks just to keep ahead of the inflation curve. Now that the end of QE has been foretold, no wonder there is retrenchment. But, don’t be fooled if QE actually continues to keep the bubble aloft. More dilution of value.
Those that want to continue the charade ask Berneke,"But why doesn't the Fed pay attention to falling gold and commodity prices, which are throwing off deflationary signals?"
Berneke has been viewed as an expert on the depression. He believes the reason for the severity was the Fed tightening money access. As a result he has been pumping $85 billion/ month to keep access open.
The problem is that did not allow the essential problem of the economy to work itself out...DEBT.
Now he has maxed out the Fed balance sheet and knows must stop QE'ing. This means we are about to experience a deflationary economy similar to the great depression as households and businesses reduce their debt. When this happens where should your assets be placed? Equities...nope. Bonds...nope. I am going with cash. And you can call me economic ignoramus too.
“Maybe I’m an economic ignoramus, but I grew up believing that paper assets represented tangible value”
Never was. Manipulation is what it is all about. Why would someone pay many times the value of a company in a stock price and call that “tangible”? For instance, an advertising agency. Maybe it is good at what it does and draws in revenue, but what is it really worth that is tangible? Maybe is has a building and some equipment, but that is all it has that is tangible. A manufacturing business at least usually has a factory that is tangible property. Everything else they have, that “profit potential”, is non-tangible.
Trading stocks is nothing more than trading fancy baseball cards. One player’s batting average increases and so does his popularity and the value of his baseball card. Same with companies: Something goes up and so does that trading card price. They don’t have to actually be worth more or provide more dividends, they only have to seem better and people pay more for the stock.
The money quote here comes from (I believe) Peter Schiff, who compared Bernanke's quandary with the situation in Japan over the last 25 years with this remarkable description of how the whole thing is constructed:
"Monetary policy was seen as a substitute for an actual economy."