This week, the stock market declined one percent after having been on a record-breaking run in recent months. The decline was driven by some lackluster earnings and unsatisfactory economic data, but mainly by ever-increasing talk of an end to the Federal Reserve's bond buying program to the tune of 85 billion dollars a month that has put the market on a sugar high for the last couple of years.
The dichotomy of Ben Bernanke's quantitative easing strategy he has imposed on the free market for the last three years, is that by its very implementation it has prevented the environment by which it can be safely tapered and eliminated. The theory behind Bernanke's academic exercise is that if the Federal Reserve prints enough money (85 billion dollars a month) and uses that money to buy government bonds, it will have a stimulative effect on a lackluster economy. The Fed's bond buying is suppose to keep interest rates low, driving money into stocks and making it more likely that banks will loan money to individuals and businesses. The increased economic activity that quantitative easing was suppose to create, the theory goes, would absorb the negative effect to the economy of its necessary end.
The problem with the simplistic and shallow economic theory of academics like Bernanke, is that by its very implementation, quantitative easing has stifled economic growth and proof of that fact is in the pathetic growth rate of Gross Domestic Product, which has averaged under two percent for the last four years. This is hardly enough growth to create the number of jobs needed to keep pace with new entrants into the job market, let alone, replace the millions of jobs lost since Ben's boss, Barack Obama, took the oath of office in January of 2009.
Now comes the time when Ben Bernanke is being forced by the laws of economics, the only law that Barack Obama and his administration can not successfully ignore, to end the seemingly endless printing of U.S. dollars being used to buy government bonds. I do not think that Ben Bernanke is a stupid man (he has degrees from universities, so that means he can not be stupid, right?) he is just an arrogant puppet master who believes that with a wave of his hand he can bring to life the dead wood of an economy that has been sitting on his lap with his hand up its backside. But alas, Big Ben's hand up the backside of the economy not withstanding, the only thing that will bring it to life is real economic growth, spurred by lower taxes, less government interference in the affairs of business and less wealth redistribution and more wealth creation that can only be accomplished by the free market.
I use to foolishly believe that the stock market was driven by fundamentals, the profit and loss of individual companies and the macro conditions of the economy at large, and maybe at one time this was the case. But what has driven the market for the last few years is the arrogance of Ben Bernanke and Barack Obama, two men who have never held positions in the private sector, but still somehow think they are more qualified to direct it than those who operate in it daily. And the exercise in ego-boosting that is engaged in by the President and the Chairman of the Fed of moving the market one way or another by a single word, is not to be overshadowed by the market mavens who are foolishly given some solace by that exercise. But the reaction of those who move money around in the market is endemic in our society at large. It is the desire for big poppa government to be there with his bottomless wallet to bail them out, whether it be because of bad investment choices or bad life-style choices. In the end, we all must suffer the bad choices that are born of arrogance from men like Ben Bernanke and Barack Obama.