If you aren’t old enough to remember when Rubik’s Cube and Cabbage Patch Dolls were hot stuff, then you probably will not recall trickle-down economics.
This was also called supply-side economics, mainly because the phrase “trickle down” usually got a chuckle from anyone with a brain who realized just what this Reagan-era policy was all about.
Let’s give credit where credit is due. The US economy was doing just fine during most of the Reagan presidency in the late 1980s. But, as with all eras, businesses sometimes needed a boost.
That’s why trickle-down/supply-side economics came up. In short, this way of thinking argued that if tax breaks and benefits were given by government to businesses and the wealthy, those benefits would “trickle down” to everyone.
Humorist Will Rogers is said to have been the first to use the term “trickle down” during the Great Depression, saying “money was appropriated for the top in hopes that it would trickle down to the needy.”
Tax breaks and such can work, but the spin that the benefits will trickle down just isn’t very honest. A lot of people can starve before enough crumbs fall off the tables of the rich.
So why am I bringing up this ancient history now? Because the Federal Reserve today is practicing a nicely disguised version of trickle-down economics. With the federal government broke and unable to provide tax breaks for anything, the Federal Reserve is trying to use the stock market as its trickle-down mechanism.
Who’s paying for this version of trickle-down economics? Anyone in America who isn’t rich or courageous enough to take part in the current stock market insanity.
The Fed last week decided not to cut back on its dangerous money-printing operation known as quantitative easing. Fed chief Ben Bernanke had prepared the financial markets for such a cut, but when the time came to follow through, he chickened out.
Everyone (except readers of this column) was shocked by the turnabout. The Fed chairman was too afraid to make even a small reduction in the $85 billion it spends monthly on rigging the bond market in an effort to keep interest rates down.
As I predicted, the Fed came to understand that the economy just wasn’t strong enough to reduce these bond purchases, which would have caused interest rates to rise more than they already have. This would have hurt the economy.
Plus, there are contentious negotiations that are about to start in Washington over the government’s debt ceiling and the federal deficit. That, too, undoubtedly caused the Fed to change its mind.
But the stock market is the most important piece in this whole puzzle. Stocks have been on a multi-year tear because of quantitative easing. All that extra money that the Fed is printing was supposed to go toward helping businesses expand and consumers buy more things.
Businesses, however, have been hesitant to borrow money to grow their operations and consumers’ income have been so weak that they don’t feel very spendthrifty.
So, much of those extra QE trillions have been going into financial assets like the stock market, which as we speak is blowing into another bubble.
Why doesn’t the Fed stop this bubble before it leads to all the bad things we know will happen? Isn’t the Fed — as the old Wall Street adage goes — supposed to take the punch bowl away just as party gets going?
The dilemma is that the stock market right now is the only thing creating wealth for Americans — at least richer Americans who have money to risk. And, if you subscribe to the trickle-down theory, all that money being made in stocks should eventually trickle into the real economy: make a million in the stock market, you’ll buy a house and car.
And the people who make houses and cars will earn more and spend more, etc., until you have a vibrant economy The risk, of course, is that people might not behave in that predictable way. They might make money in the market and just stash it, while keeping their purchases at the same level.
And while a rising stock market does make people feel wealthier, it doesn’t seem to be a very good vehicle for trickle down-economics. Think about it: someone would have to pay capital-gains taxes if he wanted to take profits made in the stock market to purchase something. So the cost of whatever a stock investor is going to buy increases by the amount of his taxes.
On the other side of today’s-trickle down economics are those who aren’t playing the stock market — the nation’s savers. They’ve been getting zero yield on their savings for years so that Bernanke can help the stock market rise.
So, in reality, the Fed has been taking money from the not-so rich to help the rich get richer in the hope that the benefits of a rising stock market will trickle down to everyone.
The bigger risk, of course, is that the stock market might collapse — like it has done regularly over the past few decades — and quickly make people feel poorer. Then, we’d have a real problem.
Bernanke didn’t say it last week, but he had to be worried about the stock market when he decided to hold off on a QE slowdown. The Fed has already lost control of the bond market, with interest rates rising without permission. It just couldn’t afford to let stocks revolt as well.