Shawn Ritenour, FloydReports.com
Defenders of the Federal Reserve have been out in force recently declaring the triumph of Money Printing 2, James Grant’s suggested more truthful term for “quantitative easing.” Some pundits point to an 18-percent increase in the S&P 500 since last August, when the Fed’s policy was announced. They also laud a significant increase in inflation expectations. Nominal GDP is on the rise again and official unemployment is lower. All of these are seen as positive economic signs, indicating that Fed policy is working. Don’t believe it.
Behind the talk is the notion that monetary spending makes the economic world go round. It does not. Increasing money supply does not magically increase the quantity of land, labor, or capital goods available for production. Creating money out of thin air does not produce more consumer goods, and there is the rub. We cannot eat money. We cannot wear money. We cannot live in money. Even the Beatles knew that money can’t buy you love.
Increasing the money stock can, however, result in higher overall prices for goods, including shares of equity stock. It should not surprise us that when the Fed increases money supply, stock prices rapidly increase. As it drives interest rates down, the Fed encourages investors to put their money anywhere they can get a better than average return. If this be in stock investments, so be it….