Politics, the Stock Market and Debt

Since January 1, 2016, the news from Wall Street has been discouraging.  The Dow Jones Industrial Average is down by something around 7% and the other indices have not performed well either.  Nor have other markets internationally been doing well .  Additionally, Wall Street did not perform well during the last two months of 2015 either.

During the earlier few years, as the stock indices kept pushing relentlessly higher and higher, there weren't too many who were questioning what caused such an unprecedented phenomenon.  However, now, as billions and billions get burned into ashes day after day, many are asking why.

There is one factor, however, which, to some observers at least, has not escaped consideration.  For years following the financial collapse of 2008, the Fed, the Federal Reserve Bank, had been pumping something on the level of $ 70 billion into the financial markets and the stock market, each and every month.  That, under a theory which Mr. Bernanke, the former Chairman of the Fed, called „Quantitative Easing,” whatever that means and something which President George H. W. Bush, the elder President Bush, may have called Vodoo Economics.  Some say the monthly amount by the Fed into the Financial Markets for years and years on end might have been less, some, maybe even more, but all agree that the amount of money pumped into the markets was enormous, beyond anything which one could possibly comprehend.

As we observed here a good while ago, to put this into perspective, $ 70 billion pumped into the financial markets every month would be the equivalent of giving, in cash, more than $ 17,000 each month to every man, woman and child in the United States.  That, most of us agree, is a staggering sum of money for years and years on end and, indeed, $ 17,000 in the hands of every living person in the United States, month after month after month, could have probably done as much, if actually not even much, much more (and more quickly) in pulling the United States out of the financial crisis which has been generously described as the Great Recession, which, we are not sure, is better or worse than a Small Depression.

The total sum of money which the Fed pumped into the markets is technically not part of the Federal Budget and did not have to be approved by Congress.  Technically, it is backed by securities of various sorts which have been purchased by the Fed but, which, if they decrease in value or fail, would create an additional debt incurred by the Federal Government.

It is relatively easy to see that, during this period,  except for the most inept, everyone made money on the Stock Market and other Financial Markets.  Perhaps it is not that much more difficult to see that once this money source dried up, the demand to buy securities, dropped correspondingly.

We all suspect, although no one knows for sure, that this extraordinary „Financial Tool” as former Secretary of the Treasury Paulsen, ex Goldman Sachs described it, ended sometime around November 2015; around that time and shortly before, the blame for the instability in Financial Markets was thrown on the Chinese; surely the Chinese bear some of the blame for what is going on but not all of the blame.

There is, however, a footnote to this which is particularly worrysome.  Currently the United States Treasury carries a national debt of something on the order of $ 19 trillion.  That, of course, is a staggering amount of debt; representing something like 20 years of Wall Street „Quantitative Easing.”   The Fed has been extremely careful in swapping these federal debt obligations for longer and longer terms, for up to 20 years, „locking in” near zero interest rates.  However, as the Fed has been forced to start inching up the interest rates, the new debt coming in from federal deficits (along with any other debt renewals has started inching upwards; this, in effect, accelerates the rate at which the national debt would increase, since none of the debt is being retired; actually, new debt has been piling up which, accordingly, would also have to be financed at the current and coming higher rates.

Mrs. Yellen, the current Fed Chairman has been trying to navigate through these treacherous and, one can even say, with much vigor and wisdom, although, regrettably, she has few allies; the current Federal Budget, not yet even agreed upon is in danger throwing the federal deficits into an even worse quagmire.
 

The Runaway Money Printing Policy of the Fed(eral Reserve Bank)

Fresh on the Heels of the Government Shutdown and the painful Necessity to raise the Debt Ceiling a surprising but not unexpected Announcement from the Fed, in the waning Days of the Chairmanship of Mr. Bernanke:

http://www.nbcnews.com/business/fed-says-it-will-keep-stimulating-economy-leaves-rates-unchanged-8C11498307

Basically, the Fed, under Mr. Bernanke's Policy of so called „Quantitative Easing” just announced that will be pouring another $ 85 Billion into the Stock Market, buying Bonds, each Month, for the foreseeable Future, until at least March ofr 2014.  This is Money which is not reflected in the Federal Deficit and Money which the Government neither has, nor has authorized through Congress.  The Report further states and we are quoting here,

Wall Street had expected the Fed to refrain from tapering its so-called Money Printing Operation. (Emphasis added).

According, to The New York Times,on the other Hand,

The statement contained no surprises, and the stock market barely budged. The Fed was widely expected to continue adding $85 billion a month to its portfolio of Treasury securities and mortgage-backed securities, particularly in the aftermath of the disruptive partial shutdown of the federal government in the first half of October.

The Fed maintained a relatively optimistic economic outlook in the statement, released after a scheduled two-day meeting of its policy-making committee. It said the economy continued to expand “at a moderate pace” and that the availability of jobs continued to improve.

Now, as Mr. Bernanke prepares to clean up his Desk and leave his Office at the Federal Reserve, the several Trillion Dollars that he has spent, under this ill advised Policy will, of course, remain on the Books backed by Bonds.  What Kind of Bonds?  Goodness only knows.  It will be Mrs. Yellen's Job, presumably, to find out.

This stubborn Policy, pursued by Mr. Bernanke, to „Lift the Economy by the Bootstraps” under some strange Trickle Down Theory strongly reminsicent of „Reaganomics” has been conducted by Mr. Bernanke, if not singlehandedly, because he has had the Concurrence (although not unanimous) of the Federal Reserve Board Members, certainly without the Approval, Appropriation or even Advice of Congress nor that of the President of the United States.

It is true, that the Federal Reserve Board is supposed to function independently.  One wonders aloud, however, if under „independently” the Framers of the Law setting up the Federal Reserve Bank had in mind it spending $ 85 Billion per Month without any Accountability whatsoever.  No such Thing has ever been done by anyone else, anywhere, ever, with the one notable Exception of Vice President Cheney, who spent Billions on the War in Iraq, also without Congressional Approval.

It must be said, in Defense of Mr. Cheney, that the Sums of Money he spent pale in Comparison to the Amounts being spent by Mr. Bernanke.

This is also coming at a Time where incalculable Effort has been spent on showing that there has not been and there is going to be Little if any Inflation in the Consumer Price Index.

It would take too long to fully examine what that Statement is supposed to mean.  However, in Shorthand, it can safely be said that „No Inflation” means „No Inflation” except that certain Things are not to be included in the Equation, to mention a Few, Energy (Fuel and Utilities), Housing, Commodities (Food) plus a Couple of other Things here and there...

Even that Theory, as flawed as it is, has come under Scrutiny by the Mainstream, although many Economists have questioned ist Wisdom for a long Time.

See...

http://www.nytimes.com/2013/10/27/business/economy/in-fed-and-out-many-now-think-inflation-helps.html?nl=todaysheadlines&emc=edit_th_20131027&_r=0


Janet Yellen, the presumptive incoming Chair(wo)man of the Federal Reserves disagrees with Mr. Bernanke and believes that a draconian Control on Inflation (while notably excluding the Categories noted above and more) is not necessarily a beneficial Policy.

But the Consequences will be for her to sort out, once Mr. Bernanke leaves.

We are not sure where Mr. Bernanke is headed; Rumours have persisted and it appears that it is his wish to return to teaching at Princeton University; we simply don't know.  Earlier, we mentioned, we believe more than once, that President Woodrow Wilson (who was also President of his beloved Princeton University), may have rolled in his Grave (more than once) at the Thought of some of the Things that Mr. Bernanke did; to this, we need to add that he surely would have also scratched his head, if he would have been able to.