An Auction with Fake Buyers, that
will end well!
The reason why is when you have the Federal government in
the form of the Federal Reserve injecting 85 Billion worth of artificial
capital, i.e., capital that wasn`t earned, or created through increased sales,
revenues or increased productivity gains.
The problem is that this ‘artificial capital’ is not real,
it is temporary and the Fed will discontinue the artificial capital injections,
and even remove the liquidity out of the system when they begin tightening.
You call it Asset Purchases, I call
it a Ponzi Scheme
So a Ponzi scheme pays out old investors with the proceeds
of the new investors. Well, current retirees right now are benefitting from
these ‘artificial injections’ into the stock market at the expense of future
retirees who will be left holding the bag on depreciating assets once the fed
stops the artificial injections, and asset prices go down. Moreover, when they
take the additional step of removing the liquidity from the system, i.e.,
tightening mode, asset prices will go down even further.
Consequently, anybody who takes money out of the stock
market while the fed is artificially raising asset prices is benefitting at the
expense of all 401k money that is buying assets now at artificially raised
prices.
In short new investors are buying assets at prices higher
than they would otherwise without the Fed`s involvement in the markets.
These are ‘Temporary Purchases’
right?
Hence the cost basis of their investments is much higher
with each artificial liquidity injection. This is great for current retirees,
but at the expense of future retirees who now have inflated assets that will
deflate once the Fed takes away the proverbial punch bowl.
Throw in the fact that baby boomers will start withdrawing
their retirement capital to live on and those are two deflationary variables
that future 401k retirees must overcome.
Nobody likes the Re-Pricing Mechanism
By artificially raising prices in a temporary fashion the
Fed is guaranteeing losses for the future for anybody who bought the assets
under these ‘artificial circumstances’ and these policies are withdrawn and the
very same assets re-price to non-artificially inflated levels.
3 Alternative Outcomes
The only way the Fed can avoid this guaranteed negative
outcome for these investors is to hope real productive growth and private
capital can substitute for the greatest artificially created liquidity market
capitalization in history.
Or alternatively, the Fed can never stop artificially raising
asset prices with the same magnitude and level of involvement. So they have put
themselves in a box, effectively committing them to QE eternity.
The other possibility is they lessen the liquidity as much
as private capital can make up the difference, i.e. a QE lite.
Should Retirees Gamble with the Fed?
But for future retirees this is entirely too risky territory
to be caught up in a scenario which the Fed seems to have no solid exit plan.
And I know that employees just sort of allocate money into the company
sponsored plan with a given level of investment choices each month without
really thinking about these deeper issues.
But every asset that employees have bought over the last
four plus years and put in the retirement account has been artificially raised
through Fed involvement. When the Fed stops being involved investors should
seriously move out of these investments and into money market funds to protect
the gains made in the artificial liquidity driven period.
Don`t be left looking for a chair,
when the music stops
Otherwise, these investors are going to be paying the price,
just like in a Ponzi scheme when the liquidity tide recedes back into the ocean
of actual asset values. Make no mistake
current asset holders are reaping the benefits, at the expense of current
investors, and future asset holders who will be left holding the bag of artificially
inflated “Non- Stores” of Value! The Federal Reserve is guaranteeing that these
assets will lose value in the future.
© EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle
