Stock prices are high. Why? The old model of buying stocks with the hope that the dividend returns would give you a better yield than bank deposits has long since gone out of style. We are back to the Clinton years game of buying stocks with the hope of selling them at a higher price, and dividends don't count.
But there is another reason why the stock market might be running so high. It might be the same reason that milk prices are running so high, why gasoline prices are running so high and why interest rates at banks are running so low. It's called "inflation".
Inflation is a term that describes the amount of printed money in circulation. When the money supply is artificially excessive due to government printing of money the bubble of money "inflates". That makes every dollar out there worth less, which means it takes more of them to buy food, gasoline and yes even stocks.
But Bernanke says there is nothing to worry about. Really?
I wouldn't say it's time to panic, but I would say it's time to use your money to buy the things you might really "need" in the future and avoid buying just the things you "want" right now. The day might come when the things you "need" cost more than you "have".
Right now the Fed is printing money to help keep banks open. Why? Because they don't have enough money on deposit to cover the loans they have out or the expenses they must pay to stay open. And why don't they have enough money on deposit? Because so many of their loans have gone into default and had to be written off.
So a lot of the money you put into their bank which they then lent to others, isn't ever coming back. And since banks are permitted to loan far more than they have on deposit (because they borrow money from other banks at one rate and loan it at a higher rate) eventually banks may begin to default on loans from other banks and a domino effect of collapse would take place.
The Fed is propping them up right now with printed money loaned at zero percent interest. And what happens when it all comes tumbling down? You won't have access to what you thought was in your account, because the bank will be boarded up and out of business.
But won't the FDIC insurance cover me? If you are first in line, maybe, but they don't have nearly enough money to cover all of the deposits so those farther back in line could lose everything.
"Well isn't this just like Cyprus?" Not according to Benny at the Bank.
Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.
The Fed chief told reporters that the central bank was monitoring the situation in Cyprus. "At this point, we're not seeing a major risk to the U.S. financial system or the U.S. economy," he said.Bernanke added, "The only way they'd create a problem is if the runs become contagious in some sense and other countries lost confidence." [CNBC]
I wonder what they were telling the people in Cyprus before the banks confiscated the people's money? What? There was no warning?
Can't say I haven't been trying to warn you.