The Fed’s latest stock market bubble is at risk of blowing up. It could blow up as soon as the Fed’s next meeting this Wednesday, or it could last longer. Either way, it is doomed.
Bubbles are inflated when the Fed recklessly creates more and more new money. The new money has to go somewhere and lately it has gone into stocks.
The question of the moment is whether the Fed will “taper” its money creation. The mere suggestion of such a “taper” sent markets into a tailspin earlier this year, so the Fed may or may not dare to make a move now.
Keep in mind, however, that a “taper” would just acknowledge the larger fact: the Fed has for the moment reached a level of discomfort and does not propose to increase its rate of new money creation. If new money creation stalls, much less falls, the bubble will immediately be at risk.
Like other ponzi schemes, a bubble requires ever larger sums of new money to maintain itself. It either grows or dies. It is the problem that Bernie Madoff confronted. It is the problem the Fed confronts today.
Less Fed money creation will destroy the stock market bubble. But even a reduction in the rate of growth of money creation will be enough to destroy it.
This is an important distinction that most economists and investors do not understand. It explains why no bubble ever survives.
Hunter Lewis is co-founder of AgainstCronyCapitalism.org, co-founder and former CEO of Cambridge Associates, a global investment firm, and author of two recent books, Free Prices Now!, about the Federal Reserve, and Crony Capitalism in America 2008-12.