Yesterday, Wall Street was entering bear pricing levels of low expectations for the future. Why?
Yes, there are worries about new reputational and regulatory difficulties facing some FANGs (Facebook, Amazon, Netflix, Alphabet, et al) and other idiosyncratic corporate ups and downs which allegedly drive investors to buy or sell the stocks of various companies. And the uncertainty over global trade wars, Chinese debt and Brexit has raised the generic risk level of world markets. When risk of return rises, prices must compensate by going lower. A bird not in the hand is worth much less than one already caught.
But there is a bigger, systemic story here which should center our attention on the workings of global capitalism.
In short, money has been cheap since the 2008 collapse of credit markets (caused by Wall Street if memory serves). Money has been cheap not because of private market decisions but because of political decisions, because of state power applied to the economy. Money is fiat currency these days, created by governments, mostly by central banks. The supply of money – liquidity – can be controlled independently of market demand. The supply of money, and therefore its price, can be intentionally manipulated on a grand scale.
Starting 10 years ago, governments and central banks did all that they could to prevent a global depression. What they did was flood financial markets with new money, driving interest rates way, way down to entice everyone to buy and spend and so keep up demand for goods and services.
With the supply of liquidity high and its price low for 10 years now, we may rightly ask the old question about public policies: “Qui bono?”: who benefits.
Cicero in his speech Pro Sexto Roscio Amerino, said “The famous Lucius Cassius, whom the Roman people used to consider the most truthful and wisest judge, often used to say in evaluating cases “Who stood to profit” [cui bono fuisset]. This is the human way: no one pursues a crime without the hope of some profit.”
While we are not evaluating potential criminality here, we are facing the “human way” when we consider the mores of Wall Street: people take action with the hope of gaining some advantage.
A low price of money (low interest rate) benefits those who want to buy money. Now such buyers of money can include firms which want to invest in expansion, creating new goods, services and jobs but they can also include those who want to buy houses and others assets, including those who want to borrow money to buy and sell securities.
The lower the price of money, the cheaper it is to speculate on Wall Street. And speculation is the fat king living very well off financial market activity.
Another thing is certain, the poor and the middle class benefit less from cheap money than do the rich. Trading in securities is not for the many but for the few, the top 10% really. And they have done very well since 2008.
Yes, with lower interest rates, credit cards have placed less onerous repayment obligations on their middle class users than otherwise would have been the case. But while asset prices in all classes have risen, income for the middle class has not. The middle class lives off income, not capital assets. And the poor have been completely locked out of economic advancement.
We must also ask “cui bono” from higher interest rates: is it not those who save? And how can the poor and the middle class ever build wealth if they do not save? The low price of money favors borrowing and spending, not saving. Which, over the long run, does what to social justice in a society?
What is the transcendent good, as Christmas gift giving approaches, for many families of having a $1,000 iPhone when you have no retirement savings to speak of?
It was once said that habits of thrift build good character which has very positive externalities in all aspects of life – from being good parents to serving as admirable citizens being sensible in their politics.
For 10 years, those who benefitted from the low cost of money have kept Wall Street prices on the rise. Pricing of securities has internalized for today projections about the future, that the price of money will stay low.
Now that the Federal Reserve is raising the price of money, Wall Street prices must readjust. With higher prices for money, we can accurately predict that speculation will fall off. The human way is to seek gain and not loss, to empower the self and protect one’s dignity. As prices rise, demand falls in order to not deplete one’s wealth. As the price of money rises, the marginal utility of the next dollar earned or spent goes up, forcing more thoughtful consideration of market decisions. We need higher or more certain returns in order to spend willingly when the cost of spending goes up.
Wall Street over the past few months has only acted very sensibly – it has re-priced the value of securities for today to take into account coming higher prices for money and lower demand for trading in securities. And for most of us, that may be a good thing in the long run when we think about social justice for our children and grandchildren.