By Tyler Bauer
The economy has been booming ever since President Trump took office. The Dow Jones industrial average has reached record highs, and the stock market has increased in value by an astounding $6.9 trillion. President Trump’s policies, such as his tax cuts, seem to be aiding the economy’s growth. So, if the numbers look great, what’s with the depressing blog title?
The success we’ve seen in the stock market is somewhat artificial. Sure, tax cuts and deregulation do spur economic growth, but I don’t think those are what are driving our stock market at the moment. Instead, the stock market is being supported by corporate buybacks. According to CNBC, the practice of corporations buying back their stocks is the only thing keeping the stock market afloat right now. Corporations buy back their stocks in an effort to create an artificial demand for their stocks. If nobody was willing to buy their stocks, this would indicate relatively low demand and reflect poorly on the corporations. So, to avoid looking as though they are unsuccessful, corporations have been buying their stocks back to make themselves look good and keep the price of their stock as high as possible. This creates an overly-successful stock market that is not reflective of the true economy.
While the appearance of a strong economy may seem nice, it isn’t if the appearance doesn’t match reality. Instead, a misleading appearance keeps the market from correcting itself and kicks the metaphorical can down the road. If corporations don’t stop buying back their stocks, the problem will only grow in size and scope, leading to a much more painful market correction in the future.
Unfortunately, corporations aren’t the only group keeping the stock market propped up. Central banks are also getting in on this practice. Our own central bank has been buying stocks to make the economy appear stronger than it really is. Why would the Federal Reserve do this? Because they want their recovery plan to work. If the public were to lose faith in the Fed, they would lose faith in the entire economy. Although it is often overlooked, our economy is built upon faith and trust. The money in your wallet, for example, is only valuable because you believe it is valuable. In reality, the dollar is just a piece of paper with some writing on it, and this has been the case since we abandoned the gold standard. So, the Fed is buying stocks to keep the public believing in the power of the dollar and the strength of the economy.
The Fed isn’t the only central bank buying stocks in the United States. Interestingly, the Swiss National Bank is also buying American stocks. To make matters worse, much of the Swiss National Bank’s holdings in the stock market are paid for with printed money, which means the stocks are now being propped up by an inflated (and devalued) currency.
I don’t mean to be so pessimistic about the economy. However, I think it’s important to highlight what’s going on behind the scenes. We’ve all heard about the stock market’s great success under President Trump, but relatively few of us have heard about corporate buybacks and the practice of central banks buying American stocks. I just want to get the truth out there, and I hope you all do, too.