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.
 

Spending $ 1.250,00 per Month for every Man, Woman and Child living in the United States

The Federal Reserve Bank has just announced that it will be spending upwards of $ 40 Billion per Month on a Going Forward Basis, for an Indefinite Future, purchasing ,,Mortgages'' from ,,Banks and Financial Institutions.''  This, in the Opinion of the Federal Reserve Bank, is going to stimulate the Economic Recovery in the United States because the Economy has been ,,growing'' according to the Chairman of the Federal Reserve, Mr. Ben Bernanke, at an ,,Unsatisfactory Rate.''

http://www.nytimes.com/2012/09/14/business/economy/fed-announces-new-round-of-bond-buying-to-spur-growth.html?_r=1&nl=todaysheadlines&emc=edit_th_20120914

First of all, it should be noted that a reasonable Assumption would be, the Decision, as ratified by the Federal Reserve Bank is the Brainchild of Mr. Bernanke, who was a Professor of Economics at Princeton University specializing in the 1929-1933 Great Depression.  Mr. Bernanke, we have noted elsewhere in this Column, has just returned from a Conference in Jackson Hole, Wyoming, a Place renowned for its Beauty and known to most Americans from Photographs and Motion Pictures.

http://economywatch.nbcnews.com/_news/2012/09/13/13846702-bernanke-aims-at-job-market-in-latest-bid-to-revive-faltering-recovery?lite

The Stock Market reacted jubilantly to the  Fed's Decision by immediately jumping more than 200 Points to an All Time High.  Some Financial Analysts characterized the Decision as a ,,Sugar Pill for the Stock Market.''  Others, characterized the Short Sightedness of Mr. Bernanke's Decision and the Disconnect which appears to exist between his Area of Academic Specialization and the Decisions which he appears to be making.  It should be noted, this Action comes in the Heels of the Fed's Program of ,,Quantitative Easing'' a Term coined by Mr. Bernanke as well.  The Results of the Quantitative Easing Plan have been described by many as highly questionable in Value.

These Actions could remind one of some of the Words used by former Secretary of the Treasury Henry Paulsen, of Goldman Sachs Fame, who alluded, no, not alluded, emphasized that the Fed had at its Disposal ,,Tools'' (words reminscent of some Kind of an Auto Mechanic or Woodworker's Toolbox) in order to handle Financial Situations.

Those of us who are far less well versed than Mr. Bernanke on Economic Policy Matters can likely make a following simple Arithmetic Calculation:  the Money that the Fed would be giving Banks, in exchange for purchasing Mortgages of Questionable Value (most likely, at full Face Value or possibly even at a Premium - Hey!  It's not easy to spend $ 40 Billion per Month when you've got only one Month to do it!), that Money actually amounts to roughly $ 1.250,00 for every Man, Woman and Child living in the United States, rich or poor, young or old, in one Word, everyone.  Unlike Banks, many of these People would spend their Money, creating Jobs, rather than use them for questionable Financial Investments, Executive Compensation or ,,Conferences'' in Exotic Locales, such as Jackson Hole, Wyoming.

Of course, everyone would have to sign a Promissory Note (at near Zero Interest Rates, as the Banks would be doing) to pay the Money Back and those who can, will, just as the Banks would; those who cannot, will not, just as the Banks would not.

http://www.welt.de/finanzen/article109233809/Boersianer-surfen-auf-Monster-Geldwelle.html

Interestingly, both Presidential Candidates did not express any Concerns or Opposition to Mr. Bernanke's Decision; true, Mr. Bernanke can act independently, without Accountability to the President; however, in the Absence of the Expression of an Opinion by the President or his Opponent, Mr. Bernanke may well take such Silence as a taciturn implicit ,,Carte Blanche'' that his Decision is an appropriate one.  We are wondering if Mr. Bernanke made the Calculation, or Analysis, whether seeking an alternative Method of spending $ 40 Billion Monthly (assuming that such Money should be spent), would not do more to ,,Stimulate the Economy and create Jobs'' rather than a Plan to purchase Mortgages, including potentially worthless Mortgages, from Banks.