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The equilibrium is wherever “the market” decides it is. With the Fed pumping trillions of dollars into the market and dropping rates to 0% for extended periods

The equilibrium is wherever “the market” decides it is. With the Fed pumping trillions of dollars into the market and dropping rates to 0% for extended periods of time, that’s not “the market”, that’s just the Fed. And I’m not just talking about now, at this moment. It goes all the way back to 2008, when rates dropped to near-zero and didn’t even break 3% before they had to drop to near-zero again for the next recession (right now). The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Basically, if the Fed is out of tools already, the only thing the Fed can do is cash injections. Which they’ve already done this year, trillions of dollars worth. And that might keep the market afloat for another year or two or ten... all while the stock market keeps going up. Not because investors think these businesses are worth that much, but because they know there will never be a decline in the market overall. And what happens when the market becomes completely decoupled from the value of the businesses they’re trading? And better question... what happens when the Fed changes their mind?

MiroF 6y ago
> The equilibrium is wherever “the market” decides it is Remind me the last time "the market" decided on an equilibrium without the Fed. 1912? > The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools." There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment. Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?
- freehunter 6y ago
  You’re right, the Fed is supposed to help stabilize the market. But their current position of “never let it crash” is unprecedented and dangerous. It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation. You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be. But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy. It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar. [1] https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate [2] https://www.marketwatch.com/story/fed-announces-unlimited-qe-and-sets-up-several-new-lending-programs-2020-03-23 https://www.marketwatch.com/story/fed-announces-unlimited-qe...
  - gdyuytgh 6y ago
    Unless Fed has been overtaken by wallst people, who use the money printing machine in their own interest. Imagine you own a 10% stake of the economy. You invest into stocks and turn the money making machine on. Others see the trend and invest as well. Then everybody runs out of money and the growth stops. So you sell your stake, turn the money making machine off and the crash wipes out lots of investors: they can't know when you turn the machine on or off, so they invest after a delay. Once the market reaches the bottom, you invest your now 15% stake and turn the machine on. Others see the growth and join. They have to join because inflation dilutes cash savings. Repeat until your stake is 50%. This is what I believe is the "market" right now, with one investor and a bunch of blind followers.

MiroF 6y ago

> The equilibrium is wherever “the market” decides it is Remind me the last time "the market" decided on an equilibrium without the Fed. 1912? > The Fed gave up almost all their normal tools and never asked for them back, and now they’re gone. Which means if the economy gets worse (and staying the same as right now for an extended period of time is the same as “getting worse”), there’s not a whole lot anyone can do about it. Despite its popularity as a talking point, there is actually little economic evidence that Fed policy becomes ineffective at the zero bound. Nor really any evidence that the Fed is "out of tools." There is huge empirical evidence that taking a expansionary stance during a recession helps lessen the impact of the recession and lower unemployment. Why would it be better for the Fed to take a contractionary approach during a recession? So the stock market better reflects how you feel it should look?

freehunter 6y ago
You’re right, the Fed is supposed to help stabilize the market. But their current position of “never let it crash” is unprecedented and dangerous. It’s not about a “feeling” and it’s not a “contractionary approach”. My concern is the Fed has taken the position that the stock market must always go up, no matter what. It’s like saying we must never allow wildfires... well eventually something will happen outside of your control and now the entire west coast is burning and there’s nothing you can do to stop it. If you just let the smaller fires burn when they wanted/needed to, we wouldn’t be in that situation. You seem to be drawing a hard black and white line, that either the Fed does nothing or they do everything imaginable. As always, there is a middle ground... let the market make its corrections and if something big happens then step in and help ease the pain. The problem with the “do anything and everything to make sure the market NEVER goes down” approach is at some point it will. At some point something will happen that scares investors and the market will drop faster than the Fed can print money. And the more out of touch the markets are, the harder it will drop and the more painful it will be. But even if the eventual crash never comes, if the Fed is willing to print trillions of dollars every year to keep the stock market up, is it really even a stock market? At that point it’s just a high-interest savings account for the ultra-rich, paid for by inflation (which hurts everyone who doesn’t own stocks). And the way that ends is the rich get richer until we end up with an oligarchy. It’s dangerous and unprecedented for the Fed to say they will keep printing unlimited amounts of money [2] in order to make sure the markets never go down. Their job is to prevent a depression, not prevent Wall Street from losing even a single dollar. [1] https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate [2] https://www.marketwatch.com/story/fed-announces-unlimited-qe-and-sets-up-several-new-lending-programs-2020-03-23 https://www.marketwatch.com/story/fed-announces-unlimited-qe...
- gdyuytgh 6y ago
  Unless Fed has been overtaken by wallst people, who use the money printing machine in their own interest. Imagine you own a 10% stake of the economy. You invest into stocks and turn the money making machine on. Others see the trend and invest as well. Then everybody runs out of money and the growth stops. So you sell your stake, turn the money making machine off and the crash wipes out lots of investors: they can't know when you turn the machine on or off, so they invest after a delay. Once the market reaches the bottom, you invest your now 15% stake and turn the machine on. Others see the growth and join. They have to join because inflation dilutes cash savings. Repeat until your stake is 50%. This is what I believe is the "market" right now, with one investor and a bunch of blind followers.