Why has the stock market rallied so strongly? Here is why: the stock market’s rise is a consequence of the Federal Reserve’s huge inflation of its balance sheet.
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A lot of commentators have been mind-boggled by the Federal Reserve and now that discombobulation has reached new heights. The Federal Reserve balance sheet is truly astronomical and hard to conceive in concrete terms. Let’s call it $1,000 for every human alive on earth.
As a side issue, this is the first time I’ve seen an axis expressed in millions of millions. These are times of “watershed.”
This balance sheet expansion is the sole cause of the bounce in the stock market but whether it will make a bounce in economic activity when the lockdowns end is yet to be seen. Likely it will only be part of the prevention of an acute and vicious meltdown of the U.S. economy.
The first spike on this curve is the initial intervention in the global financial crisis, the so called “Great Recession” credit crunch. This time however, while the cure is the same, the disease is different.
If I sneak into your house, find your stash of cash and burn it in the stove, you have and the world has less money. In the U..K you used to be able to fish out the metal strips, take it to the Central Bank and it would replace your cash for free. The money is resurrected.
This is what the Federal Reserve and other Central Banks did back then. Money got vaporized by a financial crisis and the Federal Reserve stepped in and backstopped the value of assets and thereby prevented the destruction of oceans of money. It makes sense to do that in those cases and it works.
This time no one has destroyed money because of a malfunction of the financial system. This time people have been incarcerated and forced not to produce or consume. Rather than burning your pile of dollar bills, it is akin to locking you in your basement on hard tack rations and then vandalizing your vegetable patch.
The lost work and consumption cannot be replaced or substituted. The assets that would have been created from the investment that was made have been destroyed and the investment lost. Even if you get an insurance payment, it’s not a like for like. The best that can be done to remedy the situation is to bridge the situation over the period necessary to get back to normality