Dec 232013
 December 23, 2013  Posted by at 4:08 pm Finance

John Vachon Grand Grocery in Lincoln, Nebraska 1942

I would like to get your thoughts on one of the most basic questions in an economy: what is value, what creates value, and how can value change or even fluctuate? Sometimes it’s best to take a step back and make sure we properly (re-)define the terms we use, lest confusion rules the day.

As a reference for the question(s) I want to use two articles I read over the past week. In particular, I’m interested in discussing whether the Fed’s Quantitative Easing (QE) programs have created value, and whether QE is capable of doing so in the first place. And I don’t mean obvious views like ‘money has no value at all because it’s created out of nothing as credit/debt’, we know that. I want to start with the idea that an asset, a good, plus the work man is capable of, can be assigned a value in dollar terms, and then see how that value is defined.

The first article comes from Mark J. Perry, University of Michigan economics professor and scholar at The American Enterprise Institute (and I know what various parties think about the AEI, that’s for another discussion). Perry quotes from a report by the World Federation of Exchanges, and there are some impressive numbers in that. What surprised, even baffled me, was Mr. Perry’s conclusion at the end.

Global stock rally: World market cap reached record high in November, and is back above pre-recession, pre-crisis level


The Paris-based World Federation of Exchanges (WFE), an association of 58 publicly regulated stock market exchanges around the world, recently released updated data on its monthly measure of the total market capitalization of the world’s major equity markets through the end of November. Here are some highlights:

1. As of the end of November, the total value of equities in those 58 major stock markets reached $63.4 trillion and set several milestones. First, global equity value reached a new all-time record high in November, and second, exceeded for the first time the previous all-time record monthly high of $62.8 trillion for global equity valuation in October 2007, several months before the global economic slowdown and financial crisis started, and caused global equity values to plummet by more than 50% (and by almost $34 trillion), from $62.8 trillion at the end of 2007 to only $29.1 trillion by early 2009 (see chart).

2. Global equities gained slightly more than $700 billion in value during the month of November, and increased by 1.1% from October.

3. Compared to a year earlier, November’s world stock market capitalization increased by 20.1%, led by a 23.0% gain in the Americas, followed by increases of 21.1% in the Europe-Africa-Middle East region and 15.9% in the Asia-Pacific region.

4. By individual country, the largest year-over-year gains for November were recorded in Greece (121%), Ireland (71.3%), China (50.4%), UAE (39.5%) and Japan (35.3%). In the US, the NASDAQ capitalization increased by 31.3% and the NYSE by 27.8%. The biggest losses in equity value over the last year (measured in US dollars) were posted in Peru (-21.7%), Turkey (-17.4%) and Indonesia (-17.3%).

Mark J. Perry: Compared to the recessionary low of $29.1 trillion in February 2009, the total world stock market capitalization more than doubled (118% increase) to the current level of $63.4 trillion in November, more than recapturing all of the global equity value that was lost due to the severe global recession and the various financial, mortgage and housing crises in 2008 and 2009.

The global stock market rally over the last five years has added back more than $34 trillion to world equity values since 2009, and demonstrates the incredible resiliency of economies and financial markets to recover and prosper, even following the worst financial crisis and global economic slowdown in at least a generation.

My immediate question is: really? That’s what that demonstrates? Incredible resiliency? It had nothing to do with QE and other stimulus measures? What about all the reports about increased poverty, food stamps, pension cuts, budget cuts, 50+% unemployment among young people in several countries, and many more stories from the bottom rung, how do they fit in with that incredible resiliency? How can stock markets set record new highs while economies still suffer? And why does the Fed taper QE by just 10$ billion out of a total $85 billion a month when the S&P 500 hits those new records?

Given that QE is ultimately the financial responsibility of everyone in the economy, why is it that not everyone seems to benefit from it? What about fundamentals? Wouldn’t it make sense to first produce and consume more before stocks set new records? Isn’t that what the S&P is supposed to reflect? Not that I think we need to consume more, mind you, if only because we would have to borrow more and get deeper into debt in order to raise consumption (there are other reasons), and we’re already record deep in debt (no shortage of records). I mean, isn’t it perhaps equally valid to say we see an incredible bubble building up as it is to talk of incredible resiliency? Exactly what part of “Incredible resiliency” is not merely wishful thinking? And how do you know? I know it’s Christmas time, but come on …

The second article is by Robert Frank at CNBC, who poses questions pretty similar to what I did yesterday in The Ben Bernanke Balance Sheet. In a few words: what is the link between stimulus and increasing inequality?

QE: The greatest subsidy to the rich ever?

Every Ferrari dealership in the country should have a framed picture of Ben Bernanke in their lobby. It should read: “Our #1 Salesman.”

The largesse of the Federal Reserve over the past five years has amounted to one of the largest ever subsidies to the American wealthy -fueling record fortunes, record numbers of new millionaires and billionaires, and an unprecedented shopping spree for everything from Ferraris to Francis Bacon paintings. The prices of the assets owned by the wealthy, and the things they buy, have gone parabolic, bearing little relationship to the weak, broader economy.

On Wednesday, the Fed decided to start the long-awaited taper, dialing down its purchases of mortgage bonds and Treasury securities by a combined $10 billion. But the core of its program will remain through to 2014. And even if the Fed ends quantitative easing altogether next year, it’s become increasingly clear that much of the gains from the program have flowed to the top 1%.

More millionaires have been created over the past five years than during the entire eight years of the Bush administration. According to Spectrem Group, there were 2.3 million new millionaires created between 2008 and 2012. This year, the number will likely grow by at least 200,000, which would bring the millionaire population past its previous record in 2007.

[..] According to Wealth-X, the top 10 billionaires in America saw their fortunes grow by a combined $101.8 billion this year. [..] Fed policy has fueled a surge in the value of financial assets. Since the wealthiest 5% of Americans own 60% of financial assets, and the top 10% own 80% of the stocks, those gains in financial assets have gone disproportionately to a small group at the top.

Or as James Grant, of Grant’s Interest Rate Observer said Tuesday on CNBC’s “Squawk Box,” the money is all “going to Greenwich” Conn., the wealthy hedge-fund haven. Stanley Druckenmiller, the billionaire founder of Duquesne Capital, called the Fed’s policies “the biggest redistribution of wealth from the middle class and the poor to the rich ever.”

It’s not just asset wealth that’s become more unequal. The income gap has also grown since 2008. According to Berkeley economics professor Emmanuel Saez, 95% of the income growth in the U.S. between 2009 and 2012 was captured by the top 1%. That’s due largely to compensation that’s tied to stocks—either through options or shares.

Some argue that the Fed has “punished savers” and helped the rich. That’s only partly true. If you look at which segment holds most of the interest-bearing savings or CD deposits in the U.S., it’s the wealthy that hold the most. The top 10% holds 70.5% of interest-earnings bank deposits, according to Edward Wolff, the economist and wealth expert at New York University.

All of that wealth and income piling up at the top has created huge cash hoards by companies and the rich. The savings rate of the wealthiest 1% soared to 37% this year—and more than three times their savings rate in 2007, according to a study from Harrison Group and American Express Publishing. Americans with at least $100,000 in disposable income have at least $6 trillion in savings, and that number could double by 2014, according to the study.

We have record stock market highs and record numbers of new millionaires and billionaires on the one hand. On the other, there’s the $17 trillion record in US national debt, the record $4 trillion Fed balance sheet, and the near record $11.28 trillion household debt. Put together, they somehow “demonstrate the incredible resiliency of economies and financial markets to recover and prosper”.

It has to be all of them together, right? You can’t just look at the stock market and the new rich and declare all lost terrain recovered, and all problems solved, not without accounting for two times US GDP in debt, that would be a tad careless. A $17 trillion dollar federal debt does not seem to spell “prosper”. Neither does an $85 (soon $75) billion a moth QE package, except for the direct recipients.

My initial question was about value. Mr. Perry says that “the total value of equities in those 58 major stock markets reached $63.4 trillion”. First, I’m not sure that’s the proper use of the term “value“. It certainly doesn’t look good enough to qualify as intrinsic value. Valuation, perhaps, but that’s a whimsical one.

I would like “value” to be more resilient than something that just goes from $62.8 trillion at the end of 2007 to $29.1 trillion by early 2009, and then back up to $63.4 trillion 5 years later, a move that coincides with huge rises in government debt. If anything, that seems a recipe for disaster. If we presume that a connection exists between the increase in debt on one side and the increase in “asset value” on the other, then I would say chances are we’re looking at both a gigantic wealth transfer from the poor towards the rich and a huge bubble that allows that to happen, and that will make the poor even poorer when it bursts. Which seems inevitable, because debt by itself cannot create value.

And if I’m right, what we’re seeing is not the incredible resiliency of the markets, and no real increase in asset value, but an increase in the threat to the social cohesion of our communities, cities and nations. But I could be wrong. Perhaps I’m the one who misinterprets the value of the term “value”.

Season’s Greetings from Nicole and I. Please support The Automatic Earth.

Home Forums Debt Rattle Dec 23 2013 – How Do We Define Value?

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    John Vachon Grand Grocery in Lincoln, Nebraska 1942 I would like to get your thoughts on one of the most basic questions in an economy: what is value,
    [See the full post at: Debt Rattle Dec 23 2013 – How Do We Define Value?]


    Corporations have value and people don’t. That’s all you really need to know. This is the dominant narrative of our culture and Professor Perry is perfectly in tune with it.

    As I have said before corporations have become the dominant human organizational model. So it follows that corporations whose very existence is founded upon their capitalization will hold those values as supreme.

    We are in a phase where corporations and government are fighting out what powers each will have. In the West there is not a single elected government that is not eager to cede all sorts of power to corporations. In part of course because corporations have such a powerful influence on which politicians lead governments. So it isn’t really a fair fight and so also as I say and will repeat; corporations are the dominant human organizational model. Superior to people,or super people because as we know in the eyes of the law corporations are people too. You see how circular it all is?


    What was the “Value” of the Zimbabwe Stock Market through the years of massive devaluation there?

    How has the “Value” of the Dollar held up along a trend line over the last 100 years of Fed stewardship?

    Could the Financial Markets be the new ATM? The Fed’s factory outlet for liquidity? Can’t forget, many of those “Rich” market participants are Pension Funds and Annuity Holders, no?

    Maybe what’s being foolishly engineered here is a grand trickle down experiment…that hasn’t really begun trickling yet?

    Ben has warned us of what is to come, that he has a “printing press” and knows how to use it.

    Soon, when the trickle becomes a Niagara Falls, we’ll see the mettle of the “Great Men” tested. And as long as there is a Central Bank issued Credit based Currency, there will be no deflation. That’s the stuff of Real Money, not IOU’s. (A Silver Dollar?)

    My position is, we are at the construction/fabrication stages of the Crackup boom here. When the Fed loses it and can’t stop the avalanche it will have caused by the excessive creation, distribution and stacking of binary “Values” , upon being deposed by some Populist Pol, elected by hot consumers irate over $15 Ground Round, the long awaited deflation will take center stage, after the destruction of the present monetary regime.

    At that point, after electronic entries achieve their intrinsic “Value” of around 14 cents a kilowatt hour and paper currency hit’s it’s tonnage value of a hundred bucks, (real) the bricks and mortar and resources of productivity will hopefully remain standing. Therein, “Value” will be found again. Though not priced in “What Was.”


    The FED has to keep the stock market up. People are starting to believe there is a recovery. The US is still the currency of last resort and they have been able to prop up this market for a very long time and probably will for a lot longer. I have been a long time reader of this website and many other websites such as the oil drum and our finite world…and I am starting to wonder if things might have been exaggerated by when the crash is going to happen and by how much..If you can fool the people into thinking there is a recovery maybe there will be….It is dangerous to get caught in group think….so I am trying to keep an open mind….maybe just maybe the FED has so many tools and ways of manipulating currency that they can get us out of this mess..Now don’t get me wrong something this big and possibly very deadly that we are facing is not to be taken lightly but then again one must live their lives today….Ted


    rapier – “We are in a phase where corporations and government are fighting out what powers each will have.”

    Do you think there’s a fight going on? I don’t. I think what we’re only just catching glimpses of (collusion between government and corporations) has existed for a very, very long time, perhaps since the founding of the country, but most certainly since Reagan’s time. “Some animals are more equal than others” is working well behind the scenes.

    If a congressman goes into government with little money, he certainly doesn’t come out that way. Who’s fighting? More like cashing in, then retiring to a cushy corporate job as payment for all their hard work on the corporation’s behalf.

    I don’t see a fight, but a very successful symbiotic relationship.


    ted – “The FED has to keep the stock market up.” Why is that? Is it for the same reasons they kept interest rates down for so long under Greenspan? A wizard behind the scenes manipulating dials, steering the masses, all the while espousing the “free market”?

    I liked Karl Denninger’s piece entitled, “Everything in Economics is a Balance Sheet”. What you add to one side, you take away from the other side. So, ted, who is getting helped and who is getting hurt, because it’s a certainty that someone is.


    Here’s a good article on the astronomical rise in prices due to the Fed’s handiwork. Take a look at some of the numbers!

    “The financialization of America; where Wall Street con artists, shysters and swindlers rake in billions for shuffling paper and making risky casino bets; mega-corporations ship blue collar middle class jobs to Asia in an all out effort to increase quarterly profits; politicians spend future generations into the poor house in order to get re-elected; and the Federal Reserve purposefully creates monetary inflation to prop up the corrupt system; has systematically destroyed the working middle class and created generations of debt slaves. The American people have been foolish, infantile, and easily duped. But it is clear to me who the real culprits in our long downward spiral have been. Lord Acton stated the obvious, many years ago:

    ‘The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.’ ― John Emerich Edward Dalberg-Acton”


    If you’re keeping ahead of inflation, then good for you, but there are many who are not. Personally, I’m tired of running on the Fed’s treadmill. How about you? The Fed is supposed to be providing “stable” prices. “Stable” means “not likely to change or fail; firmly established”. Is that what we’ve had?


    And just for your Christmas reading enjoyment, here are two articles that compare our current system to The Hunger Games, just to catch a glimpse where we’re going if we don’t wake up.

    May the Odds Ever Be in Your Favor – The Reaping:


    May the Odds Ever Be in Your Favor – Hope and Defiance:


    These are two really good articles from someone who I believe sees (as do Ilargi and Nicole) what’s really going on.


    The fight between governments and corporations was decided long ago. The outcome became inevitable the money corporate money was allowed to enter politics.

    But inflation there is not. If you can’t figure out how prices can rise without inflation, you’re not going to understand what happens. No chance.

    Merry Christmas to you all, in Grace and in Light.


    “maybe just maybe the FED has so many tools and ways of manipulating currency that they can get us out of this mess”

    Would these be the same tools that manipulated us into the mess? Will the Fed find “religion” and change it’s spots from those of central planning Corporatism to some form of egalitarian benevolence?

    Unfortunately, the most Valuable thing of all has been lost here. Liberty.

    As people are forced to line up at the public trough, like cattle in a feed lot, their choices diminish daily. Such is the Faustian Bargain of sacrificing liberty for security.

    Again, sans pitchforks, absolute power will continue to corrupt, absolutely.


    What if you are wrong? And the governments of the world allow the U.S to keep doing what it is doing…..Inflation rather than deflation…they will do everything thing they can to inflate the economy and that is what they have been doing and it is what path they will take in the future. I am not saying it is fair or just but this is how our society has been for the last 300 years; keeping the status quo where it is at any and all costs. They are not going to wring their hands and give up they are going to manipulate the system to keep it more of the same….and we will see them do things we never thought they had the ability or power to do….we already have seen some of that. Ted

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