Addiction

I suppose the list of things folks can become addicted to is surprisingly long.  And I’ll bet addiction was probably the last thing any addict expected would happen when they first started using.  There seems to be a subtle shift where master and slave trade places, with the former finds himself suddenly in shackles which grow ever heavier as the one-time servant usurps the throne.  Addictions are not limited just to the more noxious habits.  Donuts will do.  TV will do.  Debt will too.

Historically, where America’s economy sat in the business cycle influenced the stock market’s movements up or down.  That seems to have changed.  In an interview last February on CNBC, Alan Greenspan, former head of the Federal Reserve, said “the stock market is the key player in the game of economic growth.”  The current head of the Fed, Ben Bernanke, sees an increase in both stocks and housing as capable of generating a “wealth effect” which will induce Americans to spend more, thus revitalizing our economy.

How does the Fed think this can be accomplished?  First by keeping interest rates low.  This might prod savers who earn nothing at a bank to accept more risk, buy stocks, buy rental real estate, spend money.  But apparently in order to release these animal spirits, to induce risk takers to step forward, some ante must first be added to the pot.  So the Fed creates ever larger quantities of debt, calling it quantitative easing.  It seemed to work the first time (QE1) it was tried back in 2008, but the effects began to wear off as this initial program came to an end.  The economy began to slip; the good feelings faded.  In 2010 QE2 was introduced.  Its salutary effects were again first felt, then reversed when it ended.  QE3 was started in September of last year and remains in effect.

All of this is meant to revive the economy.  Oddly, what it apparently has done is drive money into stocks and rental real estate.  They are seeing price increases but the general economy doesn’t seem to be matching that pace.  Is debt creation turning investors into junkies?  And is our Central Bank the pusher?