Last Friday the milestone event happened – Dow Jones have got over 15,000. At the first glance this happy event is kind of strange. The American economy is not moving anywhere for many years. Official unemployment at 7.5%, but according to Shadow Government Statistics which calculations include all unemployed is really about 23%. GDP growth is something between weak and non-existent and big new tsunami of Obamacare is coming closer and closer carrying significant potential for a huge economic destruction. So why is Dow so happy?
Long ago professor of economics Ben Bernanke had got some notoriety proclaiming that in case of economic downturn government should increase money supply by all means necessary even dropping bags with money from helicopters on American cities. As result Bernanke got nickname “Helicopter Ben” and now as Chairman of FED he remains true to his credo and continue pumping money supply up even if there is no positive result to be excited at.
On the bright side the inflation is relatively tame at least according to official statistics. However official statistics mixes a lot of staff together hiding areas where real inflation is growing due to increase in money supply. It has impact on goods and services consumed by regular people, but not as big as it used to be because high level of productivity allows one productive person easily provide goods and services for a dozens, including useless and even harmful for production bureaucrats and politicians. The demand for such goods and services did not decrease dramatically because, contrary to old great depression, low income consumers had their labor income substituted with benefits from extended unemployment and social security disability. So current money oversupply has relatively low impact on their prices.
So the extra money created by Bernanke’s FED is going into assets especially relatively inflation proved assets like gold and stock market. Hence Dow’s wonderful growth is nothing more as reasonable way to defend wealth against inflation. As optimism goes this definitely demonstrates optimism about stability of American political system so companies shares will not be confiscated and government will support really big companies even if they fail in business as GM or big banks.
The simple result is that companies are sitting on trillions of dollars and not investing in business expansion, but rather continuously increasing dollars numeration of their assets. The same continuous increase of dollar numeration applies to government debt. The downside is economic stagnation when productive people have decreasing incentives to expand because of continuous threat of government wealth confiscation via taxes, while unproductive people are deprived of opportunities to become productive and increase quality of their lifes.
For me it looks like this low moving disaster will continue at least until after election of 2014 when political dynamics could change to benefit productive part of population and business expansion would start moving the way it used to be.