The market continued to be lumpy and dumpy today. James Dorn of the Cato Institute thinks he knows why, via CNN:
The long stock market rally since 2009 was fueled in large part by the Federal Reserve’s unconventional monetary policies. By promising to keep its policy rate (the federal funds rate) near zero “for a considerable period of time” and engaging in large-scale asset purchases, known as “quantitative easing,” the Fed hoped to boost asset prices and stimulate the economy.
A law of the market is that when interest rates fall, asset prices rise. As long as markets believe the Fed will support asset prices by keeping rates low, stocks will be the investment of choice, rather than conservative, low-yield saving accounts, money market funds, or highly-rated bonds.
Ah, laws of the market. I’ve seen those before. Quantitative Easing was supposed to result in runaway inflation because the government was basically printing money and injecting it into the economy by buying bank shares.
Ummm, no inflation. Sorry, please play again.
Now, I have no idea if Dorn was one of that bank of pundits, but then this really caught my eye:
The only sure path toward future prosperity is to let free markets determine interest rates and the allocation of credit. Private saving finances productive investment that increases future real income and consumption. That linkage is an iron law of economics.
Mr. Dorn must be a man of faith, because there’s an article of faith behind this statement – that a capitalistic economy has a stable rest state which can be achieved if, just if … name your economic blasphemy is corrected. The Cato Institute is listed as being libertarian, so this article of faith is unsurprising, as the libertarians spend a lot of time trying to prove it. When I gave up on REASON Magazine, their current lead on the subject was Veronique de Rugy, who frequently sped off into incoherency trying to prove her points. (She later showed up briefly on Andrew Sullivan’s The Dish, but my memory of her appearance was that it was quite brief – or she didn’t make much of an impression.)
To be honest, there are few iron laws of economics; it’s called the dismal science for good reason. In any transaction there are many motivations explicit and implicit, and if any of them are non-economic then the iron laws predicated on cost and value go by the ways. Even perceptions of trustworthiness can chew these iron laws into trinkets. I would argue “brand loyalty” makes them into chump change. I’m an LG guy myself.
Perhaps in a lab it’ll work. And in that lab there are no hostile countries ready to eat you up. That’s a problem because the concept of hostile countries isn’t going to appear in these “perfect economic models”.
So I wouldn’t pay much attention to Mr. Dorn. He doesn’t seem to know about the real world. Economic management isn’t evil, it’s merely necessary. The evil comes in the implementation, and that means the evil is optional.
And the Dow Jones Industrial Average? Down 4.15%. Probably has something to do with the new Fed Chairman. Trump’s pick, right?
