Wall Street investors are hyping up the pace of global recovery so they can buy and sell more stocks, says Nobel Economist Joseph Stiglitz.
Stock prices around the world have way outpaced economic growth over the past year, with the MSCI World Index of stocks surging 73 percent since March.
“Wall Street is talking up the recovery because it would like to sell stocks,” says Stiglitz, according to Bloomberg.
Stocks are making gains not on recovery but on low interest rates and company cost-cutting programs, both factors that point to weak economies, Stiglitz says.
“Whenever rates are low, stock markets are often high,” while economists are “almost universally pessimistic.”
Some in the Federal Reserve have hinted that interest rates could climb sooner rather than later, especially if labor markets stabilize.
“While there is considerable uncertainty about the outlook, the balance of evidence suggests that the recovery is gaining momentum,” says Federal Reserve Bank of Kansas City Thomas Hoenig, according to Reuters.
“In these circumstances, I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later.”
The Fed slashed interest rates to near zero in December 2008 and rolled out emergency lending facilities.
That could ultimately lead to higher consumer prices, Hoenig says.
“If we leave it (the fed funds rate) there too long, then we will invite a new set of instabilities or inflation.”
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