Sunday News

Abracadabra, you're wealthy

The Dow hit 14,000 earlier this month. And there was much rejoicing.

I think I heard your 401(k) cheering.

Or maybe that was you, or anyone else with money in the markets. If you're lucky enough to have investments -- beyond your house, if you have even that --you've probably seen them skip merrily skyward over the past few years. And despite the fact that unemployment remains persistently, stubbornly high, you may even see your swollen portfolio as proof that happy days are near again.

And everyone hopes you do. Because if happy days are here or near -- you'll start spending again. Right? Maybe these past few years you've (wisely) kept your powder dry. You've curtailed spending. You might have even seen your paycheck shrink in 2013 as the payroll tax was restored.

And yet: Boy, look at that 401(k), or whatever other "risk assets" you might own. Don't they look good? Heck, you're swimming in it. Why not spend some? Get that 70-inch flat panel -- why not? Put it on the credit card! Look at that monthly statement again -- you're doing fabulously. What could possibly go wrong?

Except, you know, everything.

This is where our economy is at right now. Unemployment actually went up last month. Europe continues to teeter. The headwinds are strong. And yet: Look at the Dow. Look at Nasdaq.

Look at all the money the Federal Reserve has pumped into the economy to make the Dow and Nasdaq and other indices look as good as they do.

You know, a lot of people who inveigh against the Fed and its policy of "quantitative easing" don't really get that this type of policy was inevitable. The Fed -- being a de facto arm of government --couldn't just sit idly by and let the economy crash back in 2008, nor could it sit around and wait for what we might call an "organic" recovery. That type of recovery could take a long time, and long periods of economic resentment to fester -- not that it isn't anyway.

It's the same reason government has expanded the welfare state: Hungry, jobless people tend to get upset. Upset turns to anger. Anger may turn to disorder; disorder may threaten the status quo. That needs to be headed off at the pass, so yes -- the Fed was destined to do what the Fed did.

But the belief, all along, was that what I've called Federal Reserve "alchemy" would translate into a self-sustaining recovery. The inorganic would become organic; as the Fed bought bonds, and the big banks added to their balance sheets, hopefully they'd lend out boatloads of new money (they haven't). But even if not, the financial institutions and their clients would seek bigger returns than they could get in staid, conservative investments, and that would propel the markets -- and your 401(k), not so coincidentally.

Meanwhile, with staid, conservative investments delivering such lousy returns (checked CD rates lately?) little old you might as well spend your money. Low bank rates spur consumption. And if you feel at all uncertain about spending that money -- take another look at that 401(k) statement. Stop being such a Nervous Nelly! After all, if it all goes south, you've got all that retirement money to fall back on ...

... except that, uh, if it all does go south, that 401(k) might not be so buoyant. But never mind. We're talking the "wealth effect" here, and if it all seems reminiscent of the housing bubble, it should. Because our system, now, is dependent upon bubbles; it's dependent upon the alchemy.

And the alchemy works! Let us remind you that the Dow hit 14,000 last week!

But let us also remind you that what goes up must come down; that throughout human history, boom has been followed by busts.

Our official policy is to believe we can invalidate this. And in that light, Dow 14,000 looks a little less miraculous -- and a little more Icarus.

Gil Smart is a Lancaster Newspapers staff writer. Email him at gsmart@lnpnews.com, or phone 291-8817.