What If It Doesn’t Work?

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Wednesday demonstrated once again that the world’s equity markets are responding first and foremost to central bank intervention, not traditional investment fundamentals.  The Chinese market has been battered this year, trading nearly down to its 2008 crisis lows, despite continuing reports of still vigorous GDP growth.  Upon the announcement of truly dreadful import and export data, stock prices soared by 3%.  Investors reportedly anticipated that such bad economic news would force Chinese monetary authorities to resume stimulus.

Wednesday also marked the release of the Fed’s June meeting minutes.  U.S. stocks bounced up and down after the announcement but closed little changed.  When Chairman Bernanke responded to questions after the market close, however, overnight prices soared.  Foreign markets jumped, and the U.S. opened Thursday with the Dow up about 150 points with some major indexes closing at all-time highs.  What produced such enthusiasm?  Bernanke didn’t change his message from earlier written and oral reports, but he certainly emphasized the more accommodative portion of those reports.  While tapering of the Fed’s bond buying program will still remain “data dependent,” the Chairman made it clear that today’s economic conditions remain so weak that the Fed will likely remain highly accommodative for a considerable period of time.  Investors apparently didn’t worry about the weak economic conditions.  They celebrated the prospect of continuing availability of essentially free money.

When the Fed and its European counterpart say that they’ll just keep expanding their balance sheets until they achieve their desired results, it begs the question: What if such stimulus just doesn’t work?  It clearly hasn’t worked so far, despite four years of unprecedented monetary expansion and rock-bottom rates.  Europe remains in recession, while the U.S. still suffers its worst unemployment in three decades and can’t even elevate its GDP to the somnolent 2% level.  Even a minority on the Fed argue that this process doesn’t work.  Meanwhile the debt burden grows and grows.  Sorry, future generations.