Sat, 03/06/2010 - 12:02 — Dr. Barnett

No.: 73

A contradictory investment climate exists because the Fed is feeding Wall Street with so much money. Hedge funds and investment banks don’t care that short-term Treasuries pay next to nothing. They buy Treasuries as collateral in up-leveraging speculative plays, especially in commodities. Wall Street elites expect to recoup the losses of 2008 as well as to grasp massive new profits, even if major indexes top out short of their former highs later this year or next year.

A continuing rally gives Wall Street elites an elevated platform from which to go short when the U.S. economic sovereignty crisis ripens. Additionally, the rally works to dilute the portion of total capital held by the general public — a public that is skeptical of the stock market because it has its eyes on Main Street conditions.

Wall Street is not on Main Street’s track. It doesn’t have to provide good value or quality service to America. Among the things it needs most (for now) is for the U.S. government to keep churning out more Treasuries — a point that economic analysts have largely missed. Government debt instruments (as collateral) are useful to market manipulators in supporting bid pressure on stocks, thus keeping the bull trend alive. Furthermore, the ownership of government securities provides those with massive holdings the prospect of ‘blackmailing’ the U.S. Treasury during a debt crisis — the holders pushing for government fiscal policy concessions as a condition of debt holders purchasing new debt when their securities mature.

Ironically, increasing federal debt is not yet crimping the recovery (although it will eventually). Currently, the new debt is fueling the recovery by expanding the availability of the world’s most highly regarded interest bearing securities (U.S. Treasuries). In many instances these securities are leveraged by mega-speculators to expand the portion of the total money supply that exists within the financial sector. Thus, the financial sector’s fiat money gets inflated for capital gains (and power over corporate affairs) while leaving the CPI relatively unscathed. This helps explain, in part, why overall U.S. employment is recovering so slowly. The money supply has been bifurcated into two tracks for Wall Street’s advantage.

How Elites Manipulate The Market

In view of the coming sovereignty crisis, the stock market would not be valued so optimistically were it not for the fact that hedge funds have a powerful vested interest in this rally. Each additional 1% that stock indices advance translates into much larger gains for hedge funds that bought heavily after reversing their short positions in March 2009. For example, many stocks that were $20 then are $50 now. Since a current 5% index gain may translate into a 10% price increase in key stocks, a 10% additional move on a key stock may provide an additional 25% gain on the initial investment (i.e., $5 on top of $20 in this illustration).

Mutual fund investors who enter in a tardy fashion accept substantial risks for the prospect of modest gains. But small gains on the indices from here can mean huge gains for those who switched from short to long a year ago. (Indeed, the Wall Street switch gave the Fed a new incentive to enlarge easy money policy.) The “game” is as dishonest as anything the human mind can devise.

Hedge funds that reversed their short positions in March 2009 need only put bid pressure on a small percentage of common shares outstanding — just the 1-5% available for sale at any given time. By maintaining bid pressure on, say, 2% of the outstanding shares, the “value” of the other 98% can be manipulated upward. New money is created on paper through the power of leveraged bidding. Manipulators need only a future temporary wave of public excitement about recovery or GDP growth to exploit the general public and cash in on the bogus stock valuations. When mutual fund investors finally decide in mass to increase the proportion of their retirement savings in stocks — essentially exchanging hard earned money for the stock market’s “monopoly” money — the current phase of the money coup is complete. Wall Street intelligentsia will reverse their positions again, equity markets will decline, and the U.S. will reach for international bailout money on unfavorable terms.

Wall Street's “Monetary Policy” As Bad As Fed And Congress

It is irksome how some people prattle on about the need for hard currency while saying next to nothing about the need to create a hard value stock market — a market where “gains” come in the form of fairly distributed income from earnings rather than stock price movements. What good is it to advocate an end to the fractional banking system (as some do) while leaving Wall Street with a capital structure that incorporates a similar ability to create money out of thin air? Granted, Wall Street must con the public to buy high and sell low in order to make its money creation system work effectively. Interestingly, contrarian theory says that Wall Street is quite adept at this game.

The modern Fed creates money from nothing for banking elites, thus frustrating hard money advocates and small business populists from the times of Thomas Jefferson and Andrew Jackson until now. Fed officials are guilty of unsustainable redistributive monetary policy just as the welfare state is guilty of unsustainable redistributive fiscal policy. So how is Wall Street any less guilty of unsustainable redistributive policy than the Fed or the Congress? Wall Street pumps up the paper value of stocks to set the stage for disequilibrium cycles. Once the widespread expectation of further price momentum has passed, a new cycle of winners and losers is created quite independently of the ability of Corporate America to generate profits.

The question must not be dodged. How is it any less redistributive for Wall Street to create money out of the blue — to inflate its segment of the money supply — than for the Fed or the Congress to do it? Many conservatives object to Obama-care as a plan for wealth redistribution to Democratic constituencies — partisan government borrowing money internationally for the disproportionate benefit of its supporters. Yet, many of these same individuals smiled upon the strategy when the Bush administration borrowed from the Chinese in support of economic policy that worked for the benefit of big oil and the military-industrial complex.

Why America Is At Such Risk Now

The simple fact is that America bleeds from wounds created by monetary redistribution, fiscal redistribution and Wall Street redistribution. Whatever side gains political power uses that power to plunder those out of power. It matters greatly to America’s future that the broad middle class has not found a way to defend its interests adequately against Wall Street elites, health care elites, military elites, corporate executives and politicians who cater to special interest entitlement groups.

The developing American crisis is a tragedy of the commons. In our current two party system legislators have been led to believe they cannot stay in office by looking out for the broad, sustainable national interest. Unless they leverage benefits to one partisan group by exploiting other groups less well positioned, they lose office and power. Wall Street plays the same game: It increases its income and gains beyond what is fair or sustainable by predation upon all who are not its preferred clients. All of this spells disaster as the fruits of recklessness ripen.

There was a time when quality religion was a check upon such excesses and leadership duplicity. Max Weber (1864-1920), the famous German social scientist, argued for rational economics. He viewed the religious movements of post-Reformation Protestantism as essential to capitalism in their advocacy of an ascetic and Spartan use of time and capital resources. Unfortunately, we’ve lost much of that understanding. We value growth for growth’s sake, regardless of waste or impact upon sustainability, because growth is essential to a Ponzi stock market and to a state that gains power through redistributive entitlements. Because we cannot afford such manic growth endlessly — especially debt growth — our system necessarily implodes in years to come. The eventual implosion, while fearsomely dreadful in many dimensions, becomes the necessary catalyst to usher in a better age.

Still Reason To Hope For A Better Future

Honey can come from the lion’s carcass. We’ll eventually learn enough from our challenges to build a better world — a world not built for us by the globalists who helped steer the current calamities so that they might elevate their powers in the context of world weakness. The day will come when people will no longer be manipulated by governments through the fear of terrorism.

Global elites will likely gain further power for a time but will not become the great masters of the new age. The fullness of their hegemony will be short-lived. A wounded world will come to understand the deceits by which it was misled. (Assistance may come through the moral awakening of some elites who find the courage to defect from elitist interests and work for the common good.) A new age of understanding will blossom. Healthy culture will make it possible for natural genius to bear better fruit. (Enough with weapons of mass destruction!) The scourge of ignorance will retreat. A grand time for living will unfold. In sum, this is no time for despair. The age of hope follows the day of reckoning.

Use your capital, wits, civic virtues and spiritual vitality for the good of family, friends, neighbors, communities and humanity. The remnant of people who survive the coming tragedies will someday enjoy fuller fruits of goodness under the tutelage of God Almighty. God’s wisdom will fill the earth. People will know it for themselves.