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A new set of statistics plus an action by the central bank, (Federal Reserve) dramatically showed today (Sept. 17) why Wall Street is feasting off Main Street's pain.

The Census Bureau announced that median household income, adjusted for inflation, is down 9% from 1999. The inflation-adjusted median has been flat since the late 1980s.

On the same day, the Federal Reserve announced that it would keep short term interest rates for banks close to zero, and continue purchasing bonds at the staggering rate of $85 billion a month to bring long rates down. The stock market, which had been moderately down, shot up on the Fed news, with the major indexes up around 1% or more and the Standard & Poor's 500 hitting an all-time record.

Since early 2009, the Fed, by keeping interest rates at record low levels, has flooded the system with easy money and credit. This has done very little for the economy (as the Fed admitted today), but stocks have far more than doubled.

The income gap between the top 1% and bottom 99% is now the widest it has been in almost a century -- the days of the Robber Barons. As long as the economy remains weak and unemployment high, the Fed intends to keep printing money, to Wall Street's delight.

The banks pay almost zero for short-term money and the Fed said today this will continue. Thus, interest rates on savings accounts are extremely low -- one of multiple reasons median incomes remain down. Savers are punished and speculators rewarded. Banks can borrow from the Fed for almost nothing and gamble with the funds any way they like.

(Full disclosure. I am still buying stocks. Equities have gone from around 10% of my portfolio in the early 2000s to almost 50%. Generally, I only buy blue chip stocks with yields of 3.5% or more, preferably more than 4%.)

Comments
6

Concerning: after all these years of cheap money effectively fueling the housing recovery, if (when) rates return to normal a new real estate crash is pretty much guaranteed.

Sept. 18, 2013

Dave Rice: Down the road, several crashes are coming. Housing has been supported by the Fed's money-printing and speculators have been buying homes with cash. Middle class incomes are down from a dozen years ago. However, in San Diego prices are still more than 20% below the peak of late 2005/2006.

West coast home values (SD, Orange County, LA, San Jose, San Francisco) are still far, far higher than values in the rest of the country. That's not a good portent.

The Fed's balance sheet is a wreck.The stock market is vulnerable, especially since bond yields are rising and bonds are now somewhat competitive with equities. Nonetheless, I am still betting on a further run of stocks before another crash. Best, Don Bauder

Sept. 19, 2013

Dave: I agree with you. This is when the real is unreal, in terms of healthy economics. Ex nihilo nihil.

Sept. 18, 2013

Yankeedoodle: Agreed. This is not a healthy situation. All over the world, markets are being supported by artificial money/credit creation. This has been a coordinated worldwide effort to print money. Best, Don Bauder

Sept. 19, 2013

I think this is a case of "trickle down" not trickling. The theory seemed to be if Wall Street is doing well, the economy will do well and that will be good for everybody.

If we had to have gov't and Fed intervention think it would have been better to stimulate from the bottom - more tax cuts and benefits for the lower to middle classes would have given relief to ordinary consumers and kept the economy going.

BTW I think the argument "If X is doing well then it benefit the economy (national or local) as a whole and that will be good for everybody. Therefore we should give some tax money to X" is really at the heart of a lot of scams these days. X could be sports stadia, public employee unions, Wall Street, banks, higher education, etc.

Sept. 23, 2013

ImJustABill: Trickle down economics has never worked. The Fed states publicly that it wants to run the stock market up, and that should help the economy. But 90% of stock market value, including 401(k)s, is held by the richest 10%. By holding the yields on cash and bonds down, the Fed is putting a gun to your head and telling you to buy stocks. It's not helping the overall economy at all. Best, Don Bauder

Sept. 23, 2013

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