Last week we touched on the idea of people being driven by more than just money but by other “intrinsic motivators”. This week I wanted to take this money drive to an extreme with a simple story and highlight it as a “complex” and show how it can have the opposite effect to the logical outcome one so desires.
As the markets continue to make new highs we ask ourselves what has driven this bull market, and the answer I think is glaringly obvious. The St. Louis Fed, has a terrific free charting site, and I simply placed the increase in the monetary base alongside the S&P500, you can draw your own causal relationship theories.
When you were young I am sure you were told the fascinating greek myth of the Midas touch, I know I loved this story for its rich imagery and symbolism. Here is a quick recap for those who don’t remember or never heard of it.
A king named Midas once ruled a wealthy country Phyrygia where he came across a satyr belonging to Dionyssus the god of wine and revelry. He helped the satyr who in return through Dionyssus repaid the king by offering him a single wish for anything he wanted. King Midas wasted no time and asked that everything he touched should turn to gold, and so his wish was granted.
At first the king grew more and more excited as the chair, then the table and the tree all turned to gold at his touch. However, things started to turn for the worse when he went up to kiss his daughter and she turned to gold and then every piece of food he tried to put in his mouth turned to gold. The king was now richer than he had ever been but he was also sadder than he had ever been before, having lost his child and with all his wealth he was starving to death. He begged for the “curse” to be lifted so he could live a normal life. And so it was his wish was granted and all the gold melted and ran into the river and the king shared the wealth of his kingdom with his subjects and lived happily ever after.
What comes to my mind when thinking about this mythical story is the parallel that can be drawn from the actions by the worlds central banks. It is as if the Fed has asked the god’s to grant it alchemical power to produce as much money as it will take to inflate the paper assets of the stock market to stimulate the spending of the nation to grease the wheels of the economy to create jobs and deliver riches to all and sundry. However, artificial wealth with no intrinsic value oversupplied cannot solve the complex that the world economies suffer from, in fact they are likely to make things worse. If I were to follow my analogy to its natural conclusion I should be speaking about a world heading for hyper-inflation; but this Sunday afternoon I still cannot see the inflation alarm bells. On the contrary I am seeing deflation around the corner as the Fed is eventually forced to beg like Midas to reverse this quantitative easing as it wreaks havoc on the financial and economic system. We have already entered the phase of transition where QE 3 is no longer and we wait to see how the Fed deals with its bloated monetary base.