Main Street Economy vs Wall Street Economy

Oh, the economy is doing great. The Dow Jones Average just passed 13,000.

Another interpretation has it that the US Federal Reserve is facing a crisis, and that the Dow Jones is a reflection of that. Seems like a conundrum until one considers the following chain of events.

Back in 2002 the stock market took a dive. A lot of money ran out of stocks and into real estate, swelling a speculative bubble of historic proportions. Now, the real estate boom is deflating and is causing defaults among home owners, mortgage companies and global anxiety reflected in a worldwide stock plunge back in March 2007. The Federal Reserve stepped to buy bonds, thereby pumping money into the banks that sell the bonds, which in turn put some of this into stocks, and Voila! Wall Street economics look great. Unfortunately, it's artificial, and the people on Main Street aren't sharing in the so-called great economic situation.

Worse, the Fed is stuck between an rock and a liquidity hard place. This is a new version of "stagflation." The Fed wants to tighten money supply due to inflation concerns; however, it's forced to increase money supply for the reasons described above. In other words, the economic situation is out of control. Add on top of that the global imbalances in which the US has become a major debtor nation with a weak tax base by which to service its debt, and the Wall Street economic indicators start to look pretty hollow.

Update:

On May 6, 2007 we read the following in an Associated Press article:

Still, worries linger about stagflation — slowing growth amid soaring prices — and what the Federal Reserve would do about it.

We also read the following, which reflects the disconnect between the Main Street Economy and Wall Street Economy:

Recently, it has seemed as if nothing can derail the stock market's climb....on Friday, reports that Microsoft Corp. might be mulling a buy of Yahoo Inc. nudged stocks higher despite lackluster jobs data.

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