Policy driven economy #3

This article says it all:

Americans struggle to regain their shrunken wealth

Americans’ long journey to regain the wealth they lost in the recession is stalled.

Households failed even to run in place during the April-June quarter as sinking stock prices eroded wealth. Stocks have since recovered about two-thirds of those losses. But based on last quarter’s data, household net worth would have to surge 23 percent to reach its pre-recession peak.

This is the result of policy driven economy.  How, you ask?  Simple.


That is the tax code line (along with 403b for public employees) that “forced” millions and millions of Americans to eschew real savings for false prosperity.  Of course, no real force was required, but the simple incentive of allowing people to take their “pre-tax”, or shall we say, pre-theft income, and “invest” it into stocks.

A little history of the 401k first.

The 401(k) plan–named for a section of the Internal Revenue Code–came about thanks to a 1978 congressional provision intended to offer taxpayers breaks on deferred income. In 1980, while trying to streamline a client’s profit-sharing plan, benefits consultant Ted Benna realized that the code could be used to create an easy, tax-friendly vehicle for employees to save for retirement. The client passed, but the idea took off: there are now more than 65 million 401(k) accounts, which allow participants to invest in stocks and bonds, often with matching funds from employers–all at a lower cost than the pension plans that 401(k)s replaced. The accounts helped spark a financial-industry boom, funneling billions from under retirement savers’ mattresses into mutual funds and the stock market.

The Fed played it’s part as well.  The “Greenspan put” made sure the markets would always have ample liquidity and a permanent safety net.  Later, he flooded the market with money and the market skyrocketed.  What was seen as wealth was simply a bubble of asset hyperinflation.

During the 1960’s through the early 1980’s, the stock market topped 1000 at times, but never really exceeded it.  When it did, it was not by much and not for very long.  Then, mirable dictu the market in the next decade and a half shoots to 14,000.  I’d call that hyperinflation.  Was any more real wealth created?  Hardly.  In fact, the opposite was true.  Notice that what happened – funneling billions savings to stocks and bonds – was mainvestment.

Worse still, not only did it encourage such massive diversion of funds, but it misled millions into the false belief they were wealthier than they really were.  They were led to believe, lied into believing, that they actually had something real when in fact the very opposite was true.  Their wealth was simply pieces of paper, and it’s the exact same as the Keynesian fallacy that printing money equals wealth.  It is such precisely because the stocks would never have risen in value had not the fed printed money which fueled the asset inflation.

By fooling people into thinking they were wealthier, they encouraged millions also to borrow against this “wealth”, to leverage and overleverage.  And it all seemed to work so well, until reality exploded in their faces.  The reality is simply that paper money is not paper wealth, and when the bubble burst, as it must, it becomes obvious.  It was all this fake wealth and debt induced borrowing that drove the economic “growth” of the past two decades.  It wasn’t real growth and real prosperity.

The sad fact is that even after all that, as the article makes clear, people still think somehow they have to rebuild their “wealth” by “investing”in stocks.  That somehow their stock portfolio is actual, real wealth.

There is some good news perhaps:

She and others are instead saving more. Americans saved 6.1 percent of their disposable income from April to June, the highest quarterly total in a year.

And they are slowly trimming their debt.

That is, more than ever, what the economy needs.  More real savings, less debt.  But never fear, Ben and the boys are going to destroy it, as we’re seeing with interest rates down near 0% and rapid monetary expansion.

This is policy driven economy at its worst.  It is policy designed to use market forces to direct people towards desired outcomes.

The fact remains that no real wealth was created, and when the market plunged, no real wealth was lost.  But the effects of the policy were to destroy real wealth and real prosperity through massive malinvestment.  Right now our capital structure is so terribly distorted, the solution being letting markets right themselves by redirecting those wasted resources into wealth creating activities aligned with market desires and time preferences.


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