The summer and fall turned out to be a far busier time than I ever anticipated. As a result it has been almost six (6) months since the previous edition of the Sterling Weekly. Since then the Dow Jones Industrial Average has risen 1,120.52 points or approximately 11.3%. During the that period of time we have seen the market retest and push below the "flash crash" lows and recover to set a new 2 year closing high. We have also seen an election that produced a historic change in the House of Representatives and the Federal Reserve Board (the "Fed.") announce a second round of Quantitative Easing ("QEII").
I am not a fan by any means of the 1st Quantitative Easing ("QEI"), let alone the 2nd Quantitative Easing. You can say what you want about the current Fed Policy and the nonstop parade of Keynesian economist who think this is the best and only solution to our current economic woes, but you don't need a PHD in economics to understand what an academic with at best, limited business experience is blind to; the business owners, investors, and everyone else who spends their hard earned dollars is severely un-nerved by what they see as fiscal and monetary policy that has in their opinion gone off the rails. Runaway deficits and the Fed printing money as fast as humanly possible goes against everything most people have ever been taught about sound economics. If you have any doubts about it, just look at the results of the November 2nd election.
I have long believed and written that politics is the number 1 influence on the market; and by extension on the economy. I have now come to believe that Federal Reserve Bank with its interest rate and QE policies is primarily effective at the margin and the real driver of the economy if the Fiscal Policy set by the Federal Government. To put it another way, the Federal Government sets the fiscal policy sets the main course for the economy through its spending and regulatory policies and the Fed is primarily able to influence how well we stay on course or how much we stray off course.
In the thirty (30) years since President Reagan and the Volcker Fed were able to align fiscal and monetary policy we have seen steadily declining inflation and decreasing unemployment. During that period of time four (4) Presidential administrations and Congressional delegations produced fiscal policies that encouraged business development and growth. During that period of time the Fed used its best judgment to set monetary policy that tried to keep the economy steered down the right path. However, the Fed is not infallible and despite its success in containing the damage from the stock market crash of 1987, the Fed through a policy of keeping interest rates lower than they should be helped create the internet and housing bubbles. However the Fed isn't entirely to blame. Almost everyone jumped on the band wagon and helped create the image of a rock star persona in Alan Greenspan as a god like figure who was the only person who could successfully manage the Fed and the economy. It was behind this almost cult like worship of Mr. Greenspan that those who sought to enact bad fiscal policy, whether it be in the form of deficit spending or anti-growth social engineering, were able to hide from the public view. Regardless of who you want to blame for the recent economic troubles, one of the biggest contributing factors was bad government policy.
The results of the 2008 election produced a situation where the grown up were gone and fiscal policy took a nose dive. Mr. Bernanke now finds himself in a situation much like a pilot who is desperately trying to pull his aircraft out of an uncontrollable nose dive, where he is desperately trying to pull the nation out of an economic nose dive by applying the last of his policy tools in the form of Quantitative Easing. I guess maybe he feels criticizing fiscal policy would be the equivalent of an airliner pilot abandoning ship with the only parachute and leaving a plane full of passengers to their doom; but surely even he should know the difference between economic growth and inflation.
What this country desperately needs is sound fiscal policy that promotes economic growth, and a Federal Reserve Bank that is focused on maintaining a low inflationary environment and a sound banking system. Creating more inflation is the opposite of what we need, and the public knows it. When the public is convinced that it has a government that it can have confidence in again, consumer confidence in the economy will return as well. Until then we will be enter 2011 with bitterly partisan Reid and Polosi leading congressional Democrats on a bid to regain power, and the rest of us left struggling with an unfathomable burden of new regulation that has the potential to further crush the economy.
P.S. You know that QEII is not a popular positive policy when there is a YouTube Video on QEII.
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