Why the Fed Loves the Current Stock Market (bubble) Rally: The Early 90's All Over Again?

If you are currently paying even a small amount of attention in regards to the U.S. stock market and dollar index , you might be wondering three things. 1) why isn't inflation becoming noticeably rampant given the amount of monetization of government debt and "printing" of new money by the Federal Reserve - little overall upward movement in the consumer price index (CPI), 2) how anyone, let alone "experts" in the field of economics, can be suggesting that a falling dollar is a good thing for the aggregate U.S. economy (and stability), and 3) if the dollar is falling as drastically as it is why is there a stock market rally?

Dr. Mark Thornton shows here how in many cases easy money (the Fed's manipulation of interest rates) first leads to asset bubbles, such as real estate or the stock market, before ending in an inflated bust. Moreover, the inflationary result of the easy money is what generally leads to the bust - a necessary rising of interest rates.

Money that is tied up in an asset bubble initially prevents monetary inflation from being revealed as price inflation as measured by the Consumer Price Index. However, if the monetary pumping is used to purchase assets like stocks, bonds, or real estate then the inflation is revealed in the price of those assets, which will rise even though the underlying earnings of the assets has not improved (emphasis added).

We appear to be witnessing a new asset bubble in the making, this time (again) in the stock market. Much like in the early 90's when interest rates were manipulated lower by the Fed, the ensuing result was the stock market tech bubble -- ending in 2000. And as soon as more investors enter the picture, and more profits are taken off of the table and placed in the consumer markets we are likely to begin experiencing that expected inflation. The question du jour then is, is the Fed continuing to keep interest rates artificially low in attempts to first pay back some friends on Wall Street?

Positively Unstimulating: Make-Work Programs

The AP reported today on stimulus watch, citing "stimulus boon" for several of the south and southwest states. While fully understanding that the stimulus bill has already passed (largely for political posturing purposes), I feel it still necessary in exposing the flaws of make-work economic stimulus programs. I am additionally aware of the daunting, and in some respects almost seemingly futile task before me given the high regard for conventional wisdom's bias toward make-work economic recovery programs. In fact, of the many economic fallacies that have been torn down over and over again by many prominent free-market economist, the make-work fallacy appears to be one of immortality. So, for the sake of brevity, I will merely touch on a couple errors inherent in make-work economic stimulus programs.

The Fallacy of Make-Work Recovery

The underlying premise of the make-work economic recovery notion is that the aggregate economy will be made better off as long as people have some sort of "work" to do. The basis for this notion is that as long as money is circulating an economy will grow and prosper. However, where this concept is clearly mistaken is in the idea that meaningless work, or rather unproductive employment, is mutually beneficial.

On the contrary, largely the end result from make-work stimulus is wasteful consumption of resources without any addition to the economies capital stock. In other words, there exist zero capital productivity when a man is employed to, for example, tear up a road just to put it back together. Scarce resources have been misallocated, and thus wasted. The aggregate economy does not benefit from this man's labor, nor even from his income - given that his daily pay is merely an unwilling redistribution from one (potential productive) sector of the economy to another.

Bryan Caplan, in The Myth of the Rational Voter, takes on in detail the bias of make-work. Additionally, Mr. Caplan clarifies how saving labor is beneficial to the aggregate economy, versus unproductive toil. "For an individual to prosper he only needs to have a job. But society can only prosper if individuals do a job, if they create goods and services that someone wants."

The author's in the AP story clearly, although not their intention, show the absurdity of make-work in Colorado. "On paper, Colorado posted the largest increase of any state, more than 4,700 jobs, largely thanks to a contract to set up a call center to field questions about a change to digital cable. But the jobs were spread across multiple states, underscoring one of the many hiccups in the data. Like most contracting jobs, these were temporary, and most are already over."

Costs vs. Benefits

Even granting that make-work programs are of minimal, short-term success toward local economic recovery (when successful, make-work is very short-lived and its impacts not very far reaching), the plan should still be subject to a cost benefit analysis in order to assure sound economic sense. Cost benefit analysis works well in determining a plan of action, when faced with limited resources and potentially high opportunity costs (the basis of what Mises termed the "praxeology" axiom).

The problem with cost benefit analysis and government, however, is governments are not subject to the profit loss system, and thus opportunity costs. Therefore, when government makes a plan to implement make-work programs, the cost-to-benefits become significantly diminished.

As the AP story reports, "Until more money is spent and more data come in, it is impossible to accurately calculate how much the government is spending per job". Knowing that in the long-run make-work programs result in abject failure toward creating real economic growth, I am confident in betting that the minimal benefits experienced in the short-run are significantly dwarfed by the true costs in both the short and long-term. Again, these short-term make-work projects are consuming resources, but not creating or adding back to the aggregate economies capital stock.

An Alternate Recovery Proposal

The exact cause of the business cycle (Federal Reserve's monetary policy) aside, economic recoveries typically begin with small business expansion. Economic expansion occurs after the economy has hit its trough in the business cycle. However, in order for expansion to soundly begin, government must clear out of the way for innovation and real productivity to take hold. Most importantly, moreover, is for government to discontinue all forms of interventionist policies and dramatically reduce spending and taxes. In other words, government must get out of the way of natural market recovery. This includes the wasting of resources via failed, unproductive make-work programs.

Less from Moore: A Love Affair with Misunderstanding

In the video link here, Moore concedes that what we have, and where the problems derive, is not a true capitalist social system. However, after his rather brief concession, Moore follows up with the typical line of envy and supposed injustices. These rally cries serve as a prelude to the actual content of his film.

Moreover, Moore maintains a completely (in my opinion) inaccurate understanding for true capitalism. In a capitalist system, via consumer sovereignty, market actors do vote with their dollars. So why the clamor for making "capitalism" more "democratic"? Rather, what he and America should be calling for is allowing capitalism to work freely from government interventionism.

The overall premise echoed again and again by capitalist turncoats such as Moore is merely envy and implications to create an environment of "equality of outcome" over "equality of opportunity" - more socialism. In the end Moore regurgitates FDR's call for a bill of rights for 'free stuff.

Shame on Moore for misrepresenting the facts. Maybe if we actually implemented unhampered free-market capitalism all the ills of Mr. Moore's film would become miseries of the past.