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It has recently been argued by a leading economist that the Federal Reserve’s great financial experiment of buying massive amounts of bonds (QE), dramatically dropping interest rates (ZIRP), and flooding the system with newly created money was not about bailing out the big banks, it was about Main Street jobs. That, in order to restart the economy the Fed’s began a policy of targeting not just bonds prices, but stock prices as well.

Too many people taking on too much debt caused the 2008 financial crash. Debt they could not pay back. After 20 years, the economy topped out and went bang. In the aftermath, Americans were choking on debt and unable/unwilling to continue spending at binge rates. Economists call this a Liquidity Trap. Dropping interest rates did not encourage us to borrow more and spend. Someone who already ate too much is not interested in free hamburgers.

The argument continues that it is not the level of debt, but rather the amount of debt relative to equity that matters. A $300,000 mortgage on a house worth $250,000 is not good. However, the same mortgage on a $500,000 is another story. Price influences behavior. A homeowner with $200,000 equity in their house behaves differently than a homeowner that is underwater….they spend. Furthermore, corporations are run by people, so by lifting their equity (their stock price), they would also behave differently. Expansion plans would be undertaken, plants built, orders made, and finally, people hired. Therefore, by boosting the stock market, middle class jobs are created.

In this way, the level of the stock market became a policy tool of our Federal Reserve. Their plan to escape this Liquidity Trap was to lower interest rates, flood the system with money, and thus run the stock market to change the “mood” of the economy. The plan is to boost asset prices, revive the economy’s animal spirits, which then will start creating jobs.

So, here we are. The Fed has fully implemented its Grand Experiment of Zero Interest Rate Policy and Quantitative Easing (QE). They are now one of the largest holders on U.S. Treasury bonds. Their policy of driving stock prices higher worked. The market is up. However, the economy has yet shown little response. Consumer expenditure has remained weak.

The “fair value” of proper asset prices so important to capitalist systems was no match for the determined will of the central planners of our government. The price of the stock market is now a policy tool of the Federal Reserve and freed from the Iron Law of Valuation, freed from fundamentals of the underlying economy.

So, there it is. Government policy intentionally rallied the stock market to kick-start our anemic economy. Now it is time to see if it worked.

This brings me to last quarter’s positive GNP report:

Gross domestic product, the broadest measure of goods and services produced in the U.S., grew at an annual rate of 4.6% in the second quarter.