Playing From the Sidelines
Bill Dudley, President of the Federal Reserve Bank of New York from 2009-2018, thinks that printing money does not affect stock prices.
He is lying or stupid. He is not stupid.
Via Bloomberg,
“During the past few months, the U.S. stock market has surged as the the Federal Reserve bought hundreds of billions dollars of Treasury bills to add reserves to the banking system and calm the repo market. Are the two connected? Or is the stock market going up for other reasons? The answer is important because the Fed’s large T-bill purchases will end soon. If the central bank’s balance-sheet expansion is truly lifting stocks, then the market is vulnerable when these purchases cease.
I am skeptical that the Fed’s balance-sheet expansion is having a major effect on U.S. stock prices. First, of course, correlation isn't the same as causation. Just because two things are moving together doesn’t mean that one causes the other. Second, and more importantly, the notion that the Fed’s actions are fueling a stock market bubble isn’t supported by how the Fed’s T-bill purchases are affecting short-term interest rates or how the Fed’s actions are increasing liquidity in the financial system. Third, there is a more obvious explanation behind the stock market’s rise: the prospect of a sustained economic expansion and a Fed that is likely to stay on the sidelines and not raise its federal funds rate target in 2020.”[1]
The Fed keeps interest rates low by printing money so it is not on the sidelines by definition.[2]
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." -John Maynard Keynes, The Economic Consequences of the Peace, Chapter VI pg 236
Bill knows that the market is just a confidence game at this point.
“But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.” -Ludwig von Mises, Human Action (1949), page 428.
[2] https://fred.stlouisfed.org/series/fedfunds https “The effective federal funds rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target. […] Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade.”