The Stock Market Soars, the Sequester Fizzles, and US Debt Rises Again
The US stock market has just gone to a place never seen before. It hit 14,286.37 points shattering an all time intraday high and closed at 14,253.77, a level not reached in five-years!
Why are stocks rallying? The economy is barely growing, millions remain out of work, and we are drowning in debt. There’s no doubt that Quantitative Easing is helping the markets. The Federal Reserve is not only providing easy money, it is also on a bond buying spree, snatching up billions of dollars of Treasury and Mortgage Bonds each trading day. In doing so, the Fed hopes to not only stimulate economic growth but to bring skittish investors back to the markets. On one level, it does seem to be working as evidenced by the Dow’s recent performance.
But, let’s not forget that the Federal Reserve is our national bank, and it can issue credit to buy just about anything it wants at any given time. By purchasing billions of dollars worth of bonds on credit, it is using money that does not really exist or that has not been created yet. It’s easy to do and a hard habit to break. The markets are clearly tied to the Fed’s ability to issue money out of thin air and are a direct beneficiary of the ultra lax monetary policies and loose spending culture that currently preside in Washington.
Regarding spending, what happened to the devastating impact of the Sequestration cuts? We were warned of massive lines at airports, teacher lay-offs, furloughed first responders, fewer food inspectors, less cyber security, unprocessed tax returns … things have not seemed this dire since Y2K! But, aside from the cancellation of a few White House tours, it has not been all that dramatic.
The reality is that the Sequester cuts do not go into effect immediately. Most Federal agencies have budgetary flexibility and can make cuts at different times throughout the year to lessen their impact. Some can put off spending reductions until Summer and others until Fall. This tends to defer the economic consequences. Clearly, the stock market does not seem to be too worried about any of it as “The Sequester” proved to be less of an economic issue than a political poker chip. Each party seems to hedge its bets with each impending fiscal crisis, hoping to get the better of the other in the 24 hour news cycle.
This brings us to a new phrase, “The Continuing Resolution” You’ll be hearing all about it in the next few weeks because when it ends on March 27th, the US Government runs out of money. With the threat of another government shutdown and another Debt Ceiling showdown look for more dire admonitions, more vitriol, more urgency, more haggling, more bickering … and more closed door, last minute debt deals.
The bottom line is that no matter what grand deal is struck to “keep the Government running” or what emergency funding is approved to “pay our bills” this time … US National Debt will reach the $17 Trillion mark by this summer. And, that is real debt, with real impact, and very real ramifications for our money and our future. The question we must all ask ourselves now … is where we go from here.