But I bring up Korten for a reason. There was one passage in the book that really struck me, emphasis mine:
“There are two common ways to create money without creating value. One is by creating debt. Another is by bidding up asset value...”
Price is determined by demand. “In an economy awash with money and investors looking for quick returns, that demand is substantially influenced by speculators’ expectation that other speculators will continue to push up the price. Nicholas F. Brady, who served as US treasury secretary under President George Bush, observed ‘If the assets were gold or oil, this phenomenon would be called inflation. In stocks, it is called wealth creation.’
… Now, although any one individual can sell a stock certificate at the prevailing price to buy groceries, if everyone with money in the stock market decided to convert their stocks into money to buy groceries, much the same thing would happen as happened on October 19, 1987. The aggregate value of their stock holdings would deflate like a pricked balloon.
The 'money' - the buying power – would instantly evaporate. What we are dealing with is a situation in which market speculation creates an illusion of wealth. It conveys real powers on those who hold it – but only as long as the balloon remains inflated.” [p.191-192]
My recollection of the above quote from Treasury Secretary under Reagan and Bush I, Nicholas Brady: ‘If the assets were gold or oil, this phenomenon would be called inflation. In stocks, it is called wealth creation.’ was due to an article I just read from Barron's Magazine, here's the title:
Bernanke takes credit for stock's ralley, disavows commodities' rise.
From the article:
Proving Lincoln's adage you can fool some of the people all of the time, Bernanke asserted to the credulous DC press corps that while the Fed's purchases of Treasury securities played a role in the rise in stock prices since last August, they did not affect the prices of commodities, notably food. Moreover, he rejected the premise that the civil unrest seen in Egypt and Tunisia could be attributed to Fed policy, which the questioner contended was responsible for higher food prices.
The author of the Barron's article Randall W. Forsyth, continues successfully, in my view to critique the Fed Chairman, despite Bernanke's own explanation for the rise of commodities, which he covers in the article.
I agree with Forsyth, and I also believe that there is a supply and demand issue as well due to increased demand in the developed world and recent bad weather. But nonetheless, the speculation of commodities has contributed to the rise in prices. Ben Bernanke can't have it both ways. He can't say that only stocks can benefit from his actions. No one has that kind of control. The money flows to wherever it finds high returns - regardless of how that money was created. We saw that in the summer of 208 when oil peaked at $147 a barrel.
In 2008, we witnessed a meltdown on Wall Street. If I take the (true) capitalist view to explain what transpired in 2008, I come up with this narrative:
Wall Street big banks and investment firms were a failed business model that deserved to end. This business model was parasitic, not beneficial to the US productive economy - the Main Street, small business economy, that provides most of the job creation. These big banks were also in the business of measuring risk whenever they speculated or lent money. Their measurement of risk was extremely flawed. As a result, they failed, just as a small businessperson would fail if he decided to sell snowcones to an Eskimo.
It's really that simple. That's why we have a capitalist system. Bad decisions are punished, good decisions are rewarded.
But what did we get after these banks failed? The complete opposite. Failed Bank CEOs walked away with millions in their pockets as the rest of society suffered. The too big to fail banks were saved at the expensive of the average American citizen so they can rob and plunder the people another day.
But it's no longer a US Domestic issue. Wall Street's banks are provided with liquidity not to re-invest in America, but to continue speculating, and to continue to finance the speculation of others. What is another result of this? We now have a new threat to the National Security of the US. The developing world is now suffering from the bad decisions of the big banks. It is not just affecting the average American anymore.
If the big banks were not saved, if QE was not implemented by Ben Bernanke as a back door bailout of these banks, then oil, food, etc... would not be as expensive as it is today. These big banks are not re-investing their bailout money in America. They are using this money to do what they do best: to make money from the destruction of the rest of the world.