- Financial institutions benefited from FOMC stimulus.
- But net real stimulus officially ended on April 1, 2014.
- If the FOMC continues to taper, net real stimulus will turn negative.
Net real stimulus in the United States directly benefited financial institutions like Bank of America (BAC), Wells Fargo (WFC), and Goldman Sachs (GS), and although these infusions have stabilized the financial system and provided capital to the economy for growth, the operations can have adverse repercussions.
Surprisingly, after the infusions of capital Bank of America (trading report) still has financial issues. The misrepresentations of capital requirements announced by BofA, which in turn influence the repurchase program and the dividend, should be a concern for all shareholders in Bank of America, and support the concerns that still exist in the financial system more broadly.
Imagine, for example, what will happen if the positive inflows of liquidity are not only removed, but reversed from the financial system. If after all of these capital injections Bank of America still is having problems, we should consider that a major red flag.
That brings the conversation to net real stimulus, a definition I have provided to clients to quantify the amount of money that was actually flowing into the U.S. economy as a result of FOMC policy. Net real stimulus also includes an offset, and that is the operations of the U.S. treasury, and a multiplier to further identify domestic stimulus without foreign interest. The operations of the United States Treasury Department is to sell bonds, which offsets the operations of the FOMC who is buying bonds.
The net real stimulus in the United States economy during calendar 2013 was $20B per month, an infusion cycle that came like clockwork, and that arguably flowed directly into asset classes like the stock market and real estate. Our discussion began by referencing issues with Bank of America specifically, and yes, Bank of America benefited from these infusions as well.
The question is when will these infusions stop? According to the same calculations that measured net real stimulus in calendar 2013 at $20B per month, net real stimulus has actually already stopped. Net real stimulus ended on April 1, and if the FOMC continues to taper its bond buying program this week net real stimulus will be negative.
Specifically, net real stimulus in the US economy will be $-10B per month if they taper this week, a net drain on liquidity, a drain on the financial system, and that will cause severe repercussions in the asset classes that benefited directly from stimulus dollars.
If after the cycles of positive stimulus we have already seen Bank of America is still in financial trouble be prepared for worse down the road. Net real stimulus is already poised to turn negative because the FOMC is not likely to diverge from its tapering program this week, especially with Janet Yellen's concern about prices. I consider that a very risky concern given the state of the underlying economy and the exaggerations to growth that the FOMC stimulus programs have cost according to my macroeconomic work, The Investment Rate, and if she starts to focus on prices more than the underlying economy things could get much uglier throughout the financial system.