With the Dow Jones having reached 14,000, it can be said that the worst losses on the index since 2008 have been made whole. But does that mean the global economic crisis is over? Hardly, as what we are seeing on Wall Street is totally unconnected to the real economy, American or global, as most economists and experts realize. The Dow Jones rally is a product of financial engineering, as opaque as any mortgage backed security, courtesy of the U.S. Federal Reserve and its chairman, Ben Bernanke.
While the rally on Wall Street has been occurring, unemployment in virtually every advanced economy, including America, has remained at historically high levels, despite unprecedented deficit spending by governments. With austerity now replacing stimulus as the mantra of policymakers in the United States and Europe, there is no realistic likelihood for any meaningful reduction in the unemployment rate in the U.S., eurozone and UK in 2013. Currency wars are being waged by desperate governments, as economic strife leads to political unrest and instability, and geopolitical tensions threaten to blow up what remains of an anemic global economic recovery at anytime during the next twelve months. Yet, despite the dire straits and fragility of the real economy, central bankers worldwide, but especially the Federal Reserve in the United States, have succeeded in raising equity valuations with all the deft cunning of a snake charmer.
By design, the Fed, spooked over a moribund economy that is saturated with sovereign debt and enfeebled by incompetent policymakers, has deployed monetary policy for one purpose; to create the mother of all asset bubbles, right on Wall Street. Fed Chairman Bernanke has imposed an essentially zero interest rate policy, or ZIRP, for what seems an eternity, with the objective of punishing savers and fixed income investors, and forcing them to plow their money into equities in search of any yield above real inflation, irrespective of risk factors.
The brokers on Wall Street are obviously delighted. But this stock market engineering by Ben Bernanke can only work in the long-term if the real economy recovers. Failing that, there is the old Newtonian law of physics; whatever goes up must surely come back down to earth.