Otherwise there’s little that the Fed can do about wages, about price gouging, about stock buybacks, about supply chain disruptions, commodity shortages, climate change or wars. Inflation is global right now, for global reasons. — Xtrix

The Fed can only manage the short term effects of all this stuff. Right now it is sending a signal to employers that it will stop any potential wage spiral. It will engineer a recession if that is what's needed to lower worker's expectations.

The discourse around Powell's confirmation was grim. I'm still new to a lot of this stuff, but it was eye opening to see how many people think the Fed is the only arm of the government that can function properly. It's only good for saving banks during a crisis and crushing labor when it begins to organize.

Basically the Fed plays an important role in allowing capitalism to survive. It can't do much to make capital operate in a fair or productive way, but it stops the system from collapsing.

Hey this is my first post around here. I don’t know a ton about formal economic theory but I’ve been trying to learn more. This is less me trying to prove anything and more me trying to think through what’s in the OP.

The middle class putting its savings into the stock market does lead to some odd dynamics. The basic idea is that wage-earners should be able to turn their wages into capital. Their money doesn’t sit around doing nothing. It can fund new productive ventures. This should be good for society and middle class investors.

Like you’ve said, this isn’t how it actually works. Would it be right to say that buying a stock is simply buying an older investment? If you buy a stock when it is issued you are buying something with a theoretically unlimited return. You then sell the stock when you think it will give you its highest realistic return or when you want liquidity. Whoever buys it still gets the potential for endless returns.

Theoretically there could be a benefit to this. The needs of early investors and later investors might not align. Whoever buys the stock when it’s issued might want a higher return. Once the investment creates something that can generate proven (but not astronomical) returns it might be more attractive to a middle class person.

The key variable that would determine if this is a positive for society has to do with the “information deficit.” It’s possible that early investors are better at knowing which unproven assets to invest in. In this case the middle class provides those early investors with liquidity to take on productive risks. A virtuous circle results if the initial stock has room to grow and the initial investors know what they are doing. Some of the goods those risky investments produce can be bought by aspiring retirees, since their growing wealth in stock allows them to spend their wages more freely.

However, the whole thing also has the potential to be a disaster. It could be that investors mostly sell stock when they believe it has reached its highest realistic value or when they think the value of the stock will fall. In that case the savings of middle class retirees are pushed into a market for investments that aren’t expected to generate more revenue. Why wouldn’t Warren Buffet want a market like that to grow?

I’ll wrap this up but I have a question about increasing interest rates. If rates lead to demand destruction (indirectly through unemployment and directly through devaluing retirement plans) doesn’t that hurt the potential return for fixed assets? Someone needs to buy the goods those assets produce. Is it worth it to make fixed assets relatively more appealing to stocks even if they have less absolute potential?

Sorry if none of this made sense lol.