What is Mr. Bernanke doing with QE2 (quantitative easing part two)? By his own admission, he is unleashing a flood of money into the system in order to forestall deflation. And how is more (fiat) money going to help the so-called "real economy"? Again by his own admission, by pumping up asset prices (i.e. stocks), creating a wealth effect and thus giving birth to a virtuous cycle of confidence, consumption and investment.
Here's an excerpt from the link above, an op-ed Mr. Bernanke wrote for the Washington Post a few days ago.
"And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion."
That's an astonishing statement of intent, coming as it does from the Federal Reserve, but let's accept it at face value (but, really, could you ever imagine that a head of the nation's central bank would act as a stock jobber for the S&P 500?).
Still, is Mr. Bernanke's asset-bubble strategy any different from what Mr. Greenspan did following the dotcom whump-and-dump of 2000-02? Oh, not really - except that Uncle Alan chose housing and crappy mortgages, while Brother Ben's choices are shares and Treasurys. I guess the former was burned by his correct but ill-timed Irrational Exuberance comment (and in markets timing is, after all, everything), whilst the latter has no such inhibitions. Yet.
What can I say...? Does it matter what you drink, if you end up face down in the gutter in an incoherent alcoholic stupor?
One more time: what we need, and what needs to be seriously targeted by all concerned, is higher earned income (wages and salaries), not more debt-inflated asset prices.